As expected, interest rate unchanged - Israel Business, Ynetnews

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As expected, interest rate unchanged

Bank of Israel's Monetary Committee decides to leave its key rate for February at 1.75% as committee members fear further cut in rate will increase demand for mortgages, pushing apartment prices up

Amnon Atad, Calcalist
Published: 01.29.13, 06:56 / Israel Business

The Bank of Israel's Monetary Committee decided Monday evening to leave its key interest rate for the month of February unchanged, at 1.75%, meeting analysts' expectations.


Last month, the central bank slashed the interest rate by 0.25%. In the past 16 months, interest rates were reduced six times by a total of 1.5%.


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The decision to leave the interest rate unchanged reflects the fact that there have been no unusual changes in the economy in terms of price hikes since last month's interest decision.


Although the expected inflation for the next 12 months recently increased slightly by 0.2%, it still amounts to just 2% - exactly at the midpoint of the government's inflation target range (1-3%).


The actual inflation rate, calculated for the past 12 months, now totals just 1.6% - a six-year low.


The current relaxation on the inflation front allows the Bank of Israel to cut the interest rate in order to support economic activity. Lowering the interest rate reduces manufacturers' costs and increased demands, encouraging economic activity and increasing growth.


But the Monetary Committee members fear that an additional cut in the interest rate will push the demand for mortgages up, leading to a further increase in apartment prices.


This concern is based on figures released by the Central Bureau of Statistics, which show that apartment prices went up by a relatively sharp monthly rate of 1.1%, completing an annual increase of 5.7%, compared to a 4.7% increase in the previous month's report.


Although apartment prices are not included in the consumer price index, the Bank of Israel is extremely concerned by their further increase due to the fact that a rapid increase usually leads to a rapid reduction. A sudden plunge in apartment prices may threaten the stability of the banks, which are under the direct responsibility of the central bank.



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