Bank of Israel Keeps Base Rate Unchanged

Rate stays at 1.75% as Bank of Israel navigates monetary policy between a weakening economy, a strong shekel and an overheating housing market.

Dror Raich
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Dror Raich

The Bank of Israel's monetary committee on Monday left the base lending rate unchanged for March at 1.75%, as it tries to navigate monetary policy between a weakening economy, a strong shekel and an overheating housing market.

"The battle is between real estate and the dollar - or between the housing bubble and the international currency war. These two main elements contradict each other in the Bank of Israel's decision," said Golan Sapir, deputy CEO at Sigma Investment House, after the announcement was made.

"The continued inflating of the housing bubble with cheap money encourages leaving the interest rate as is, and might even signal an impending rise. On the other hand the collapsing shekel-dollar exchange rate makes it hard on exporters," he said.

In announcing its decision, the central bank noted that the rise in housing prices has been accelerating. It increased 6.7% in the 12 months that ended in December, compared with 5.8% in the 12 months through November. Mortgage activity has remained brisk despite repeated efforts by the Bank of Israel to stanch it.

Meanwhile, the shekel has been gaining against the dollar in the last month or so. Exports were down in November-January as the economies of Europe, Israel's biggest overseas market, struggle with debt. "Clearly a lower interest rate will actually contribute toward weakening the shekel against the dollar. This is in the Israeli national interest as part of the global currency struggle and easing exports," said Sapir.

In fact, the Bank of Israel indicated that the outlook for the Israeli and global economies had shown some recent improvement. "Surveys indicate an improvement in expectations of economic activity in the business sector, and the most recent monthly indicators show a possibility that there was some improvement in January in the rate of activity," it said.

"The widespread assessment is that the risk of a deterioration in the global economic crisis has declined - [although] at this stage, it is too early to determine whether this represents a positive turnaround," it added.

Asaf Shaul, CEO at Alfa Platinum Mutual Funds, said he still believed the trend was lower for interest rates. "In our opinion this is just a delay, and next month we'll see the Bank of Israel lowering rates," he said.

The Bank of Israel will make its next rate decision on March 24, which will be in force for April and May instead of the usual one month. "The decision to keep the interest rate unchanged shows that the Bank of Israel is currently more worried about the possibility of fueling the housing market price bubble than the possibility of worsening the economic slowdown and a slide toward recession," said Shmuel Ben Arie at Pioneer Financial Planning.

"However, we'll probably see another interest rate drop next month," he said.

Bank of Israel building. Credit: Emil Salman
Central bank rate.Credit: Haaretz

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