Bank of Israel Governor Stanley Fischer
Photo: Reuters
Bank of Israel keeps interest rate at 1.75%
Concerned by rising housing prices, central bank's Monetary Committee avoids cutting its key rate for March so as not to increase mortgage demand
The Bank of Israel's Monetary Committee decided Monday evening to leave interest rates for March unchanged, at 1.75%.


Two months ago the central bank reduced its key rate by 0.25%, and in the past 17 months it lowered interest rates six times by a total of 1.5%.


The decision to leave the interest rate unchanged for another month contradicts figures published recently, which support a further cut in short-term interest rates: Last week, the Central Bureau of Statistics (CBS) reported that the Israeli economy was experiencing a clear and continuous decline.


The last quarter of 2012 recorded sharp drops in most GDP components: Exports of goods and services fell at an annual rate of 6.5%, private consumption per capita went down 1.7%, and investment in fixed assets recorded a relatively sharp drop of 11.7%.


The actual inflation rate, calculated for the past 12 months, is now under control and amounts to just 1.5%, below the center of the annual target range set by the government (1-3%).


The past four months recorded three negative consumer price indices, and the inflation trend during this period reflects an annual inflation rate of 0.9%. The basic inflation rate (the CPI excluding housing, fruit and vegetables which are subject to seasonality) is even lower, totaling just 0.6%.


Yet in spite of the relaxed inflation front, prices continue to rise in the housing market. This development continues to concern the Bank of Israel, preventing its Monetary Committee from lowering interest rates so as not to increase the demand for mortgages.


According to figures published recently by the CBS, apartment prices went up by a further 1% in the past month, completing an annual increase of 6.7%.


Although apartment prices are not included in the CPI, the central bank 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 Bank of Israel.



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