BoI: Home price rise risk has moderated

The interest rate cut for March was a 4-1 majority decision.

The Bank of Israel unexpectedly cut the interest rate for March by 25 basis points to 0.75%. According to the minutes of the Monetary Committee meeting, the vote was not unanimous: four committee members voted for the cut, while one member voted to keep the interest rate unchanged.

The majority of the Monetary Committee members agreed that the interest rate cut was a necessary step in light of the decline in the inflation environment, the slowdown in GDP growth, the weakness in the labor market, the cumulative appreciation in the effective exchange rate, and the fear of an additional slowdown in the global economy. They emphasized that this step was required despite the risk involved in continued home price appreciation. The risk was said to have moderated, as seen in the reduction of the risk characteristics of new mortgages.

The main factors for the decision were the Consumer Price Index (CPI) for January, which was lower than expected, resulting in an inflation rate of 1.4% over the 12 preceding months, at the lower end of the government's target range. After the CPI was published, forecasters lowered their 12-month inflation forecasts, all of which are below the midpoint of the target range.

As for growth in the fourth quarter of 2013, GDP rose at annualrate of 2.3% and private sector product rose by only 1.6%. Most committee members agreed the GDP growth rate, primarily growth of private sector product, was moderate, and that there is an expectation this trend will continue.

In the month preceding the Monetary Committee meeting, the shekel weakened by 1% in terms of the nominal effective exchange rate. Since the beginning of 2013, there has been a cumulative appreciation of 7.3%. The committee members agreed that the Bank of Israel’s direct intervention in the foreign exchange market contributed to the weakening of the shekel, but that the cumulative appreciation recently was still hampering business activity.

As the main consideration against reducing the interest rate, developments in the prices of assets, primarily homes, and their potential impact on financial stability, were discussed. Home prices rose by 8.1% in the past year and the increase in mortgages being granted continued. Concern was raised about the long-term effect that a low interest rate can have on demand for homes, but the committee members noted that the measures adopted by the Supervisor of Banks were effective.

Published by Globes [online], Israel business news - - on March 10, 2014

© Copyright of Globes Publisher Itonut (1983) Ltd. 2014

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