BoI concerned over rising home prices, low supply

Bank of Israel: Home prices have increased at a rapid rate in recent months. Only supply-side measures can lower prices.

The Bank of Israel Monetary Committee sees no signs of a moderation in housing market activity. The minutes of the interest rate decision for March, in which the committee kept the interest rate unchanged at 1.75%, state that only supply-side steps can increase the housing inventory and lower prices.

"Home prices have continued to increase at a rapid rate in recent months. Committee members emphasized that monetary policy acts primarily on the demand side, while the required steps are supply-side steps that have the ability to lead to an increase in the inventory of homes while reducing prices, and such steps are not expected before the new government is constituted and the budget is passed."

The minutes also reiterate the Bank of Israel's warning about the deficit and the need for new taxes. "The Committee also assessed that the budget deficit in 2012 was primarily structural, and that the government would therefore need to make significant cuts in expenditure and to raise taxes in order to meet budget targets for 2013 and 2014. Failure to meet those targets will reflect fiscal expansion and negatively impact the credibility of budgetary policy, especially since the economy is operating close to full employment."

The Bank of Israel also warned about the continued decline in export, and that, in the long term the economy cannot base its growth solely on domestic demand. Although it believes that the risks of deterioration in the crisis abroad have declined recently, global trade forecasts also remained low compared with global trade growth rates of the past.

As for exchange rates and capital inflows, the minutes state, "The positive interest rate gap with large economies abroad and the continued quantitative easing in those economies continue to support the inflow of capital to the Israeli economy… Despite the appreciation of the shekel in recent months, the exchange rate has basically returned to its level prior to the depreciation that took place last summer following the security-related tension."

Five of the six members of the Monetary Committee voted to keep the interest rate unchanged, and one voted to lower it by 25 basis points. The members who supported keeping the interest rate unchanged cited indicators of expected real activity, compared with previous months, and the turnaround in imports, which may point toward an end to the slowdown. They also warned that reducing the interest rate might spur housing prices, while further steps on the supply side are not expected to have an effect in the coming months.

Published by Globes [online], Israel business news - - on March 11, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

Twitter Facebook Linkedin RSS Newsletters גלובס Israel Business Conference 2018