March Interest Rate to Drop?

The thinking is that the base interest rate will either be left at its current 1.75% or be lowered to 1.5%.

The Bank of Israel's announcement of its interest rate for March will be made this evening after the monetary committee makes its decision on Monday. The thinking is that the base interest rate will either be left at its current 1.75% or be lowered to 1.5%.

Analysts are mindful of the central bank's announcement last week that it would be taking new steps in the mortgage market to cool housing demand. This stance seems to make it less likely that the central bank would lower interest rates, as doing so would increase demand for housing and work at cross-purposes with its effort to dampen demand. Nonetheless, the prospect of a reduction in the March rate is not being ruled out.

Last week a Bloomberg survey of 18 economists found that eight of them forecast a base rate reduction of 0.25% for March. Nonetheless, the news service noted, three of the four decreases in interest rates last year were not predicted by most of the analysts surveyed. Several significant factors would lend support to a reduction in the base rate, most importantly the disappointing economic growth figures over the past several months.

According to the Central Bureau of Statistics, in the last quarter of 2012 the economy grew at an annualized rate of 2.5%, and the expectation is that growth will continue to be sluggish in the coming months compared to the economy's potential. Also supporting a lower interest rate to help jump-start the economy are the weak foreign trade figures of recent months.

Finally, the strength of the shekel against the dollar, which is supported by relatively high interest rates here compared to the United States, is also an argument in favor of a lower rate. A strong shekel is especially problematic for exporters because it makes Israeli products more expensive when prices are translated into foreign currencies.

On the other hand, other major factors would lead to a decision to keep interest rates where they are, at least for another month. The most compelling of these is that a reduction of interest rates would spur additional demand in the already overheated housing market. Other factors in support of leaving the rate at 1.75% are the argument that any change should await the formation of a new government following last month's election, and the approval of the 2013 budget; and the sluggishness of overseas markets.

Monetary experts suggested yesterday that the Bank of Israel has proven in the past that it is capable of dealing with the strong shekel through means other than the interest rate. In the past, the central bank has bought up dollars to prop up its value against the shekel. (See related story on page 9. ) This approach has the advantage of not overheating the housing market.

Emil Salman