Fischer Loan Curbs Fuel Israel Rate Cut Bets as Growth Slows

Governor Stanley Fischer’s latest steps on housing credit are spurring bets that the Bank of Israel will cut the benchmark interest rate next week as growth slows and the shekel trades near a 16-month high.

One-year interest-rate swaps, an indication of investor expectations for rates over the next 12 months, declined for a sixth day, falling three basis points to 1.6 percent at 1:52 p.m. in Tel Aviv, their lowest since July 2009. The shekel weakened against the dollar for the first day in four, losing 0.2 percent.

The central bank told lenders on Feb. 19 to set aside more money against losses from home loans, and increased the amount of capital that banks are required to hold against most mortgages. Some economists and investors saw the move as aimed at enabling lower rates without pushing up house prices.

“The steps announced by the Bank of Israel were intended to prepare the ground for a rate cut,” said Nira Shamir, chief economist for Israel Discount Bank Ltd. “Economic indicators, which point to slowing growth, along with moderate inflation and a strong shekel, support an additional rate cut.”

The monetary policy committee, led by Fischer, has gradually reduced the borrowing rate from 3.25 percent in 2011 in an effort to shore up the economy amid the European debt crisis. It voted unanimously last month to leave the rate unchanged at 1.75 percent.

Bank’s Decision

Eight of 18 economists surveyed by Bloomberg forecast a quarter-point reduction in the rate in the bank’s next decision on Feb. 25, compared with one out of 15 at the end of January. The others surveyed expect the bank to keep the rate unchanged.

The Fischer-led Bank of Israel has surprised economists in about a quarter of its rate decisions, more often than any other Organization for Economic Cooperation and Development country for which comparable data is tracked by Bloomberg. Three of four rate cuts last year, the most recent on Dec. 24, weren’t anticipated by the median forecast in Bloomberg surveys.

Fischer, who announced last month that he would step down after eight years on the job, has used a dual focus on employment and growth, alongside price stability, to help Israel weather the global financial crisis better than most developed countries.

Since 2009, output has expanded by 14.7 percent, compared with 10.7 percent in Australia, 3.2 percent in the U.S. and a contraction of 1.5 percent in the Eurozone, the Finance Ministry said in a report.

Slowing Growth

Fischer has cited concerns about house prices, which have increased almost 70 percent in the past five years, according to the official statistics agency. Housing credit has jumped about 76 percent during the same period, according to central bank figures.

The economy expanded an annualized 2.5 percent in the fourth quarter, the slowest in more than three years, as exports declined and investments fell. Inflation declined to 1.5 percent in January, remaining below the midpoint of the government’s 1 to 3 percent inflation target for a fourth month.

The steps announced Feb. 19 are not the first the central bank has taken to cool housing prices. In May 2010 the bank increased provisions for home loans where buyers put up little equity. A year later it capped variable-rate mortgages at one-third the value of the total loan, and in October last year it set maximum loan-to-value limits for the first time.

“The new limits raise the chance of an additional rate cut in the near future,” Ofer Klein, head of research at Harel Insurance & Financial Services Ltd., said in e-mailed report. “The continued, untreated increase in home prices was one of the significant factors that have delayed the rate cut until now.”