The Bank of Israel Monetary Committee today cut the interest rate for November by 25 basis points to 2%, taking analysts by surprise. The Bank of Israel had kept the interest rate at 2.25% for four months. The Bank of Israel cited the need to provide additional support for economic activity, and the absence of inflationary pressures for the interest rate cut.
In a related move, Supervisor of Banks David Zaken has published a draft directive to limit the loan-to-value of new mortgages. The Bank of Israel cited the increases in home prices in recent months, and the continued increase in housing credit against the background of low interest rates in the mortgage market, as the reason for the directive limiting the loan-to-value ratio, in order to support the stability of the banking system.
As for the interest rate cut, the Bank of Israel cited the latest indicators which show moderation in the growth rate to 3%, pessimism in consumer surveys and the Business Tendency Survey, indicating further slowdown. "Economic activity in the first few months of 2013 is expected to be affected by the fiscal restraint inherent in the monthly expenditure limitation until a new budget is approved," said the Bank of Israel.
The Bank of Israel also cited the debt crisis in Europe and the high level of economic risk from around the world, which could negatively affect the Israeli economy, as reasons for the interest rate cut. "Macro data published this month in the US and in Europe were mixed, and for the most part surprised to the upside, but this was relative to already low forecasts. This month the IMF reduced its global growth forecast for 2012 and 2013. Inflation worldwide continues to be low, and it continued to moderate in emerging market economies. Commodity prices, which declined this month, are also expected to support this trend. Central banks in major economies continue with quantitative easing programs, and several central banks reduced their interest rate this month."
The Bank of Israel observed that home prices have risen by 1.4% over the past12 months, by 2.9% in the past six months, and by 0.6% in October. "The increases in home prices in recent months and the continued growth in housing credit raise concerns of a continued increase in home prices," said the Bank of Israel.
Published by Globes [online], Israel business news - www.globes-online.com - on October 29, 2012
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