Bank of Israel Governor Prof. Stanley Fischer has admitted that the low interest rate is the main force driving up the prices of homes in Israel. In the Bank of Israel's Inflation Report for the First Quarter of 2010 Fischer wrote, "The rise on the price of apartments in Israel is to a great extent the outcome of low interest rates." Fischer also stated that low interest is also partly fuelling the rises on the share and bond markets.

The Bank of Israel last week decided to leave the interest rate for May unchanged, in part due to concerns about the debt crisis in Europe. In its inflation report, the Bank of Israel wrote that the economic recovery worldwide is stronger than foreseen but is "not uniform" and "its strength is uncertain." The Bank of Israel mentioned that economic recovery rests largely on assistance by governments worldwide, and again reiterated concerns about the spread of the debt crisis.

The Bank of Israel sees interest rates continuing to rise, but gradually, and in line with interest rates worldwide. The report said, "World uncertainty intensifies uncertainty about the strength of growth in Israel - a situation that restricts the maneuverability of policymakers in the Israeli economy, which is small and very open to and connected to the world."

The report forecasts that inflation in 2010 will fall to 2.2%, which is lower than the capital market expectations of 2.7%.

Regarding the shekel, the Bank of Israel wrote, "Opening up the gap between interest rates vis-à-vis central banks worldwide too quickly might bring about the strengthening of the shekel and harm the profitability of exporters and economic growth."

Published by Globes [online], Israel business news - www.globes-online.com - on May 3, 2010

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