Central Bank Sees Lower Oil Prices Posing Little or No Downside for Israeli Economy

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Oil pump jacks at work in Williston, North Dakota, on December 19, 2014. Oil prices have tumbled recently.Credit: AP

The sharp decline in global oil prices over the past eight months is lowering Israel’s energy costs, clearing the way for businesses and households to spend the savings on products and services that give a boost to the economy, the Bank of Israel said in a report Monday.

“At least part of the [income] sources released [by lower oil prices] will be channeled toward the purchase of products, services and other factors of production. The use of energy itself may increase as well,” the central bank said in its half-yearly monetary policy report, warning that an uptick in energy use would have a negative impact on the environment.

The report saw little downside to the decline in oil prices, which have tumbled 60% in global markets since June. The price of benchmark Brent crude futures was up 50 cents, to $53.50 a barrel.

In December the Bank of Israel raised its forecast for Israeli economic growth this year to 3.2% from a previous projection of 3%, citing improved exports and incoming tourism. Nevertheless, Monday's report said interest rates were unlikely to rise before 2016, as inflation will remain very low.

The cheaper fuel is unlikely to create potential budget problems in Israel due to lower tax revenues because much of the tax on energy is set in shekel terms, currently 3 shekels (76 cents) a liter, not as a percentage of the price. Even value-added tax revenues, which are set as a percentage, won’t fall as fuel consumption is likely to rise, the report said.

The bank said lower energy prices would increase the surplus in Israel’s balance of payments in its current account, which is likely to strengthen the shekel. But rather than warning this could undermine the Bank of Israel’s policy of weakening the shekel, the report stressed the positive factor of keeping down consumer prices.

Turning to the housing market, the Bank of Israel warned that home prices would continue to rise until a good solution was found for increasing construction starts and making more homes available.

Home prices rose 5.8% in the 12 months until October 2015, a relatively low rate, compared to the range of 5% to 10% they have been rising since the end of 2012. But the central bank ascribed the moderation to the government’s abortive plan to exempt many home purchase from VAT, which caused buyers to put off purchases.

More recently, however, price rises have resumed at a faster pace, it noted.

The bank’s chief concern is the fast pace of home loans being taken out to buy homes at ever-increasing prices, a phenomenon that has been encouraged by record low interest rates in Israel after the central bank lowered its base lending rate to a record low of 0.25% over the summer.

“One of the main risks to financial stability created by the low interest rate environment involves the stimulation of demand for credit and the fear that when the interest rate eventually begins to rise, borrowers will find it difficult to repay their debt,” the report said. “The main financial risk originates in the housing market.”

Nevertheless, the bank said the risk in home loans has been contained due to measures to limit the size and payment terms of home loans.

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