Bank of Israel Unexpectedly Cuts Key Interest Rate

October 29, 2012

Israel’s main central bank interest rate was sliced by 25 basis points in the first reduction since June and the fifth such move since September 2011.  The 2.0% rate level hasn’t been this low since January 2011.  If no further rate change is announced in November or December, this will be the fourth straight calendar in which the Bank of Israel’s interest rate changed by 75 basis points.  The rate level was 0.5% at the end of 2008, 1.25% at end-2009, 2.0% at end-2010, 2.75% at end-2011, and 2.00% now.  That consistency disguises a trend reversal in September 2011.  Four rate hikes totaling 125 basis points were administered in January, February, March and May of 2011, but cuts of 25 bps occurred in September and November.

Analysts did not foresee today’s monetary easing.  CPI inflation had accelerated from 1.6% in May to a 12-month increase of 2.1% in September.  A statement from the monetary policy committee does not anticipate continuing acceleration and observes that measures of expected CPI inflation for the coming twelve months are also hovering in the middle of the 1-3% target range.  Meanwhile, Israeli economic growth has moderated to around 3%.  Some fiscal restraint will be felt early next year, and a high level of global economic risk has not dissipated.

Officials at the central bank are worried about accelerating property values, however.  To blunt this development, a separate bank directive was issued today, instructing mortgage lenders not ” to approve a housing loan (mortgage) with an LTV of greater than 70 percent—excluding a housing loan granted for the purpose of the borrower acquiring a first home, for which a maximum LTV of 75 percent will apply.”

The next policy meeting is scheduled for November 26.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



Comments are closed.