Governor of the Bank of Israel Prof. Stanley Fischer has raised the interest rate for October by 25 basis points to 2%. This is the fourth time this year that the Bank of Israel has raised interest rates.

As expected, Fischer was swayed in making his decision by the sharp rise in apartment prices. In its statement announcing the interest rate hike, the Bank of Israel said, "House prices are still increasing steeply, and housing loans continue to expand rapidly reflecting the low rate of interest and the slow adjustment of the supply of houses. The housing component of the CPI is still rising, at an even slightly faster pace than in recent months."

The Bank of Israel also expressed concern about the effect of house price rises on inflation. The Bank of Israel said, "Inflation in the last twelve months was close to the midpoint of the target inflation range, but inflation expectations calculated from the capital market for one year ahead and those of the private forecasters remain in the area of the upper limit of the target inflation range."

The Bank of Israel spoke of continued rapid expansion of the Israeli economy and the desire to return interest rates to a "normal" level. The statement added that, "The interest rate is expected to rise to about 2.7% in a year's time."

The statement concluded, "The Bank of Israel will continue to monitor Israeli and worldwide economic and financial developments, and will use the instruments available to it to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, including keeping a close watch on developments in the housing market, and specially on house prices."

Published by Globes, Israel business news - www.globes-online.com - on September 27, 2010

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