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Fischer Holds Israel's Benchmark Rate at 2% as House Price Growth Slows

The Bank of Israel held the benchmark interest rate unchanged for a third consecutive month as the shekel appreciated and growth in housing prices slowed.

Governor Stanley Fischer kept the rate at 2 percent, the Jerusalem-based central bank said today in an e-mailed statement. Thirteen of the 17 economists surveyed by Bloomberg had forecast the decision, while four expected a quarter-point increase.

Near-zero interest rates in the U.S. and Europe have spurred record inflows into Israel and other countries where rates are higher, driving gains in currencies and undermining exports. The shekel has strengthened about 6 percent against the dollar since August 2009, when Fischer began raising the rate, even as the central bank bought foreign currency to cap gains.

“Fischer held the rate due to the interest rate gap and concern that this could hurt exports,” Ayelet Nir, chief economist at Tel Aviv-based Israel Brokerage & Investments Ltd., said by phone. “Other factors include lower inflation expectations and a slowing down in the rise of housing prices.”

The bank said in its statement that the gap between higher interest rates in countries such as Israel and other developed nations “present a serious challenge for policy makers.”

Photographer: Simon Dawson/Bloomberg

Stanley Fischer, governor of the bank of Israel. Close

Stanley Fischer, governor of the bank of Israel.

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Photographer: Simon Dawson/Bloomberg

Stanley Fischer, governor of the bank of Israel.

The shekel strengthened by 0.3 percent to 3.5803 per dollar as of 6:21 p.m. in Tel Aviv, little changed from before the announcement.

Fischer has lifted the benchmark rate by 1.5 percentage points since last August. The Bank of Israel has been buying foreign currency since March 2008, more than doubling reserves to $68.3 billion by the end of November.

Shekel Strengthens

The central bank said its decision to leave rates unchanged was also due to a slowing in the growth in housing prices.

Fischer said Dec. 22 that there are “preliminary signs” that the expansion in housing prices is slowing, after warning in November of the risk of a “bubble” that could destabilize the financial system. Inflation, which has been fueled by increases in housing prices for the past two years, slowed last month to 2.3 percent, the first time it has eased since July.

To contain prices, the bank has tightened requirements for mortgages, while the government has taken steps to free up more land for development. Growth in housing rental costs slowed to 3.9 percent last month, from 4.5 percent the previous month, the Central Bureau of Statistics said Dec. 15.

Economic Growth

Economic growth slowed to an annualized 3.8 percent in the third quarter, from 4.5 percent in the second quarter, as exports fell 9.6 percent. About 40 percent of Israel’s gross domestic product is export-based. The economy is expected to expand 3.5 percent next year, compared with 4 percent this year, Bank Hapoalim Ltd. said last week.

Fischer, who has sole responsibility for setting interest rates, was appointed for a second term as governor in March. He is in the process of implementing a new law that calls for the creation of a six-member Monetary Policy Committee to make rate decisions.

The benchmark TA-25 stock index has gained about 15 percent in the past 12 months, led by Avner Oil Exploration LP, a partner in gas fields off Israel’s coast.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net.

To contact the editor responsible for this story: Louis Meixler at lmeixler@bloomberg.net

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