The Bank of Israel has reported to raise the June 2011 Israeli basic interest rate by 0.25 percent points to 3.25%.
The main reason Bank of Israel raised its basic interest rate is due to the rising Israeli inflation: During April 2011 the CPI rose by 0.6%.
Another reason is Bank of Israel attempts to slow down the recent developments in the housing credit: according to BOI the current outstanding credit on households inclined by 1.4% during March, and reached 345 billion NIS. During the last 12 months, a total of 50 billion NIS were granted in mortgages by the Israeli commercial banks – a 25% increase compared to the same time span a year earlier. Roughly 47% of the new mortgages that were given during April 2011 were indexed to the prime rate. The new restrictions of BOI on mortgages that are indexed to the prime rate might cause a further drop in these types of mortgages in the months to come.
That being said, according to Bank Discount, the demand for housing is still robust, and during the first quarter of 2011 there were 25.7 thousand purchases of new and second hand housings – a similar amount as in the first quarter of 2010; however, the number of only new apartments sold inclined by 11% compared to the same time in 2010, and reached during first quarter of 2011 10.9 thousand housings.
Assuming that new housings are priced higher than second hand housing, and then it only makes sense that there will be a rise in the average housings sold; consequently people will need to take bigger loans. The only question as to the risk in grating bigger loans to purchase a house is whether the banks took the necessary precautions when granting a loan or not.
The current interest rate at the same level it was back in November 2008 as seen in the chart below:
The basic interest rates in major western countries, including Euro zone and USA, are still low. This may keep the Shekel strong compared to major currencies, however the recent news about the debt concern in Europe caused the Euro/USD to drop over the last few days; this news also helped the USD/ NIS to rise today by 1.209% to reach 3.516.
It’s still not cleat what is the future direction of the USD and consequently, will the recent move by Bank of Israel will further strengthen the Shekel compared to the USD.
In the mean time, as seen in the chart above, the recent rises in the Israel interest rate over the past year doesn’t seem to curb the rising Israeli inflation; part of the reason is probably related to the rising prices of major commodities including crude oil and natural gas worldwide.
Nonetheless, I still think that Bank of Israel will continue to moderately raise the Israeli basic interest rate in the months to come in an attempt to curb the inflation and cooling off the Israeli housing market.
Want a more detailed analysis on Inflation in Israel? IBR can do it for you…read here for more
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