The Bank of Israel warns that rising housing prices jeopardize economic stability. In the Monetary Policy Report for the first quarter (previously known as the Inflation Report) states, "The development of prices in the past twelve months, which rose 4.3%, points to a significant acceleration in the rate of inflation in the first quarter of 2011.
"The trend of rising housing prices, which began in the beginning of 2008, was reflected in the latest data published during the first quarter, and their increase over the preceding twelve months reached 16.1%. These developments increase the concern that the trend of rising housing prices - if it continues - could jeopardize the financial and real stability of the economy."
If the message is not clear enough, the Bank of Israel added that the rise in housing prices exceeded fundamental factors in the economy, reflecting a bubble under Bank of Israel definitions.
The Bank of Israel said, "The Consumer Price Index (CPI) increased 0.7% in the first quarter of 2011, significantly above the midpoint of the inflation target range, seasonally adjusted. The steep rise of the CPI was influenced by domestic factors - housing prices and fruit and vegetable prices, and by external factors - global prices of energy and commodities."
The housing item (rent) in the CPI rose by 1.3% in the first quarter. "This rate reflects pressure in the housing market, which also affect housing prices, and is extraordinary for the first quarter, which is characterized by negative seasonality."
For the first time, the Bank of Israel warned about speculation by foreign investors in the foreign currency market. "Balance of payments figures show that capital imported by foreigners into Israel in the quarter surveyed continued to be focused in the purchase of makam (short-term debt issued by the Bank of Israel) and in deposits with local banks, rather than direct investment or purchase of shares. The balance of makam held by nonresidents reached $12.5 billion, more than a third of the total stock of makam. The implication is that this capital inflow, which affects the exchange rate, is motivated by short term considerations.
The Bank of Israel said that it intervened in the market, buying foreign currency, in order to reduce the influence of these short-term inflows on the exchange rate. In January, it also imposed a reporting obligation on Israeli residents on their transactions in foreign currency derivatives, and on nonresidents on their transactions in foreign currency derivatives and in makam.
The Bank of Israel warned that security incidents and the political shocks in the Arab world could weaken the shekel against leading currencies - something that has not yet happened despite the upheavals and rising uncertainty.
Published by Globes [online], Israel business news - www.globes-online.com - on May 3, 2011
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