Bank of Israel: Low Interest Rates Lifted Home Prices

Increases in home prices in Israel are partly the result of low interest rates, Bank of Israel Governor Stanley Fischer states in the preface to the Bank of Israel’s periodic Inflation Report, a precis of which was released yesterday.
In the report, on inflation during the first quarter of 2010, the bank governor also noted: “The increase in share price around the world, and in Israel, reflect in part the economic recovery, and the expectation that it will continue, but a portion of it is certainly a by-product of the low interest rates in most countries.”

The Bank of Israel’s research division predicts inflation will be 2.2% over the next 12 months, which is close to the midpoint of the government’s 1% to 3% target range. However, both investors in the capital markets and analysts widely predict that inflation will be a somewhat higher 2.7% in 12 months’ time.

The Bank of Israel’s periodic Survey of Companies puts 12-month inflation at 2.45%.

In his preface to the periodic inflation report, Fischer writes: “Inflation rates around the world are still generally low, although a rise in inflation is beginning to be noted among developing countries. Most central banks in developed countries are continuing to maintain low interest, but some have begun to reduce their use of unconventional instruments.”

The report stresses that in the fourth quarter of 2009, real economic activity in Israel continued to recover, as unemployment declined. Growth in Israel was supported by an increase in private consumption, driven in part by low interest rates and a growth in exports following the expansion of worldwide trade.

Early indicators from the first quarter of 2010, the report says, point to continued expansion of business activity in Israel and a rise in the price of financial assets, meaning stocks and bonds, along with housing prices.
The report said the recovery among the developed countries was weak and fragile and was “mainly based on very heavy monetary and fiscal intervention, which cannot continue indefinitely.”