Bank of Israel Holds Rate for 3rd Month as Home Prices Climb

The Bank of Israel kept its benchmark interest rate unchanged for a third month, as policy makers focus more on climbing domestic home prices than on the pace of recovery in the global economy.

Governor Stanley Fischer and the monetary policy panel held the rate at 1.75 percent, the lowest in almost three years, the Jerusalem-based bank said on its website today. Sixteen of the 21 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarter-point cut.

“The decision to hold the rate for another month signals that the Bank of Israel is more worried about the possibility that the housing price bubble will balloon than it is about the economy slowing down and slipping into recession,” Shmuel Ben Arie, head of research at Pioneer Financial Planning, said in an e-mailed statement.

The Bank of Israel has gradually reduced the borrowing rate from 3.25 percent in 2011 as the European debt crisis crimped growth in the country’s biggest export market. The monetary expansion has helped to fuel a jump in housing credit and home prices, which soared more than 50 percent since 2009.

“The rate of increase in home prices continues to rise,” the central bank said today. In the 12 months that ended in January, home prices increase by 8.6 percent, compared with an increase of 6.7 percent in the 12 months to December, it said.

‘Mixed’ Global Economy

The central bank also cited the new government’s fiscal challenges in its decision. To abide by Israeli budgetary rules, the government must reduce spending commitments this year by 13 billion shekels ($3.6 billion), the central bank said. Prime Minister Benjamin Netanyahu’s new government was sworn in last week, and it has until August to pass a budget.

On the global front, the macroeconomic picture is “mixed,” the central bank said. Still, it appears that the likelihood of a global economic crisis is receding, and the high level of uncertainty that prevailed in the past year has been reduced, the bank said.

“It is quite probable that the last interest rate change by the monetary committee led by Governor Fischer is behind us,” said Alex Zabezhinsky, chief economist at Tel Aviv-based DS Securities & Investments Ltd. “The next step will be a rate increase, but that step will be decided on by the next governor, and it probably will happen toward the end of the year.”

Fischer will leave the central bank at the end of June.

Growth Forecast

The economy is forecast to grow by 3.8 percent in 2013, assuming that natural gas production from the Tamar drilling site will begin as planned during the second quarter, the central bank said today. Excluding the natural gas, GDP is expected to grow by 2.8 percent.

Economic growth slowed to an annualized 2.4 percent in the fourth quarter, the slowest in more than three years, as exports and investment declined. Inflation remained at 1.5 percent in February, the fifth month it stayed below the midpoint of the government’s 1 percent to 3 percent target.

The yield on the government’s 4.25 percent benchmark notes due March 2023 fell five basis points, or 0.05 percentage point, to 3.95 percent today, the lowest since March 7, at the close in Tel Aviv. The shekel strengthened to a 17-month high, gaining 0.3 percent to 3.6550 a dollar on March 22, as Israel renewed diplomatic ties with Turkey. Israeli markets will be closed until March 27 for the Passover holiday.

The central bank imposed tighter regulations on home loans last month, requiring banks to set aside more capital and provisions. In October, it set maximum loan-to-value limits for the first time, after capping variable-rate mortgages at one-third the value of the total loan six months earlier. In May 2010, it increased provisions for home loans where buyers put up little equity.

“The Bank of Israel has tried to use supervision and prudential regulations to slow down bank mortgage lending, but this has not proved to be effective,” Daniel Hewitt, senior emerging-market economist at Barclays Plc, said before the announcement.

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