Bank of Israel keeps interest rate unchanged as housing prices rise

The Bank of Israel kept its benchmark interest rate unchanged at the lowest in more than two years on Monday 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 central bank said on its website. Ten of the 22 economists surveyed by Bloomberg forecast the decision, while the remainder predicted a quarterpoint reduction.

Fischer announced last month he would step down at the end of June.

The Bank of Israel has gradually reduced the borrowing rate from 3.25% in 2011 in an effort to shore up the economy amid the European sovereign-debt crisis. The monetary expansion has helped fuel a surge in housing credit and home prices, which have increased by about 70% over the past five years.

“The decision not to reduce the interest rate... 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,” said Ofer Klein, the 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, he said.

Coalition talks

Prime Minister Binyamin 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 NIS 14 billion from the budget, Finance Minister Yuval Steinitz said last month. Israel’s deficit last year reached 4.2% of gross domestic product, more than twice the government’s target.

While the bank did not cite the budget uncertainty in its main considerations for the decision, it did mention the rapid increase in home prices. In the 12 months ending in December, home prices increased 6.7%, compared with 5.8% 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% in the fourth quarter, the slowest in more than three years, as exports and investment declined. Inflation slowed to 1.5% in January, remaining below the midpoint of the government’s 1% to 3% target for a fourth month.

Fourth-quarter growth may have been hurt by Israel’s military conflict in the Gaza Strip in November, the central bank said, adding that it was too early 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, the chief economist for central and eastern Europe, the Middle East and Africa at Morgan Stanley in London, said in an email.

The shekel appreciated after the central bank announced its decision to hold the rate at 1.75%. 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.