Bank of Israel Leaves Interest Rates Unchanged at 0.75%

Home prices continue to rise amid slowdown and continued uncertainty over housing market.

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The Arlozorov tent city in Tel Aviv this month. Housing prices continued to rise this year.
The Arlozorov tent city in Tel Aviv this month. Housing prices continued to rise this year.Credit: David Bachar

The Bank of Israel left June interest rates unchanged, at 0.75%, as part of a plan that the central bank said Monday was intended to keep the inflation target within the 1% to 3% range over the next 12 months and to “support growth while maintaining financial stability.”

Future interest rate changes depend on developments in inflation, economic growth and the global economy, said the central bank’s monetary committee. The shekel’s value in the international currency market and the monetary policies of central banks around the world will be among the important factors affecting interest rates.

Reactions to the announcement came quickly, with analysts differing over whether it was predictable or unexpected.

“The Bank of Israel decision was surprising, in that it chose not to lower interest rates despite multiple economic figures that noted a worsening of the slowdown,” said Joseph Fraiman, CEO of the Prico Group investment house. “It seems the monetary committee of the Bank of Israel did not just make do with the data received so far and wants to see if the slowdown in the first quarter is here to stay. In our opinion, there was a real need to lower interest [rates] by 0.25%, to a low of 0.5%, since the economy is on a slippery slope on its way to recession.”

Economic growth indicators released this month show a slowdown, and the shekel weakened by 0.4% in the past month.

But though Fraiman said the interest rate decision was surprising, a survey conducted Sunday by the Psagot investment house found that two-thirds of the investment advisors polled expected rates to remain unchanged. A similar survey conducted by Bloomberg found that 10 out of 18 analysts expected no change.

Two of the primary considerations underlying the interest rate decision were the fact that the consumer price index increased by only 0.1% in April, markedly lower than expectations, and that the rate of inflation over the previous 12 months was only 1 percent, the Bank of Israel said. Inflation is expected to decline in the coming months, to below the lower end of the target range.

In addition, home prices continued to rise in February and March. Their annual rate of increase remains around 6%-7%, and the rate of mortgages taken out remains high. Building starts are also slowing down somewhat, said the central bank.

“This month, as well, there is continued uncertainty regarding the effect on housing market price levels and activity volume of the policy measures that the government decided upon,” it said in a statement.

The risk of encouraging the real estate bubble to continue is always a major consideration in the interest rate decision, and the central bank decided to avoid the danger Monday, said Moshe Shalom, who heads the research department at online forex trading broker FXCM Israel.

Shalom also said the Bank of Israel appears to have been aware of employment figures released Monday, given that it refrained from taking a risk by lowering interest rates, and to have taken into consideration the signs of life the dollar has shown in the past two weeks, with the exchange rate nearing 3.5 shekels.

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