Bank of Israel Keeps Rate Unchanged as House Prices Rise

The Bank of Israel kept its benchmark interest rate unchanged at the lowest in more than two years as rising house prices balanced slowing growth and inflation.

Governor Stanley Fischer and the monetary policy panel held the rate at 1.75 percent, the Jerusalem-based bank said on its website today. Ten of the 22 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarter-point reduction. Fischer announced last month that he would step down at the end of June.

The Bank of Israel 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. The monetary expansion has helped fuel a surge in housing credit and home prices, which have increased by about 70 percent in the past five years.

“The decision not to reduce the interest rate today raises the chance for a reduction next month, unless the new coalition, whose composition will be known by then, can’t agree on the framework for a budget cut,” Ofer Klein, head of research at Harel Insurance & Financial Services Ltd.

The two main reasons behind the decision not to lower the rate were the surge in housing prices and the lack of a 2013 budget, Klein said.

Coalition Talks

Prime Minister Benjamin Netanyahu called early elections, which were held in January, after failing to reach an agreement on budget cuts for 2013. He is currently in negotiations with potential coalition partners to form a new government.

Israel must cut 14 billion shekels ($3.8 billion) from the budget, Finance Minister Yuval Steinitz said last month. Israel’s deficit last year reached 4.2 percent of gross domestic product, more than twice the government’s target.

While the bank didn’t cite the budget uncertainty in its main considerations for the decision, it did cite the rapid increase in home prices. In the 12 months ending in December, home prices increased by 6.7 percent, compared with 5.8 percent in the 12 months to November, the bank said. The volume of new mortgages taken also continued to grow, it said.

The Bank of Israel imposed tighter regulations on home loans last week, requiring banks to set aside more capital and provisions.

Growth Slows

Economic growth slowed to an annualized 2.5 percent in the fourth quarter, the slowest in more than three years, as exports and investment declined. Inflation slowed to 1.5 percent in January, remaining below the midpoint of the government’s 1 percent to 3 percent target for a fourth month.

Fourth quarter growth may have been hurt by Israel’s conflict with Gaza in November, the central bank said, adding that it’s too early therefore to assess whether the decline in growth represents a “turnaround” in the economy.

“Fischer and the rest of the committee probably wanted to see some progress on the fiscal front and thought that it was too soon to ease given the price rise in the housing sector,” Tevfik Aksoy, chief economist for central and eastern Europe, the Middle East and Africa at Morgan Stanley in London, said in an e-mail.

The shekel appreciated after the central bank announced its decision to hold the rate at 1.75 percent. It gained to 3.7109 at 5:33 p.m. in Tel Aviv, after trading at 3.7127 before the decision. It was trading at 3.7163 at 7:09 p.m.

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