The Bank of Israel today published the minutes of the discussions preceding the decision last month to raise the interest rate by 25 basis points to 2%. The minutes show that the Bank of Israel's board of directors was unanimous in recommending that the interest rate be raised and much of the discussions focused on the housing market.
The Bank of Israel observed that house prices rose sharply over the past 12 months. The minutes said, "It was noted that house prices had increased by 20% in the 12 months to July (inclusive), against the background of the rapid expansion in housing credit reflecting the low rate of interest and the relatively slow adjustment of the supply of houses."
The Bank of Israel sees housing price rises slowing down, "The point was made that according to the latest information the rate of increase in house prices had moderated to an increase of 0.7% in June-July compared with 2.2% in May-June but it was too soon to assess whether this is a trend change in house prices. New mortgages in August exceeded those in July, and were significantly higher than the average in 2009."
The prices at which houses are sold is not part of the CPI. The housing component in the CPI measures rental contracts, so changes in rent levels affect the CPI.
The Bank of Israel also expects house rentals to rise fast. The minutes said that the "Rate of inflation in the next 12 months is expected to be 2.5%, and the interest rate is expected to increase gradually to about 2.7% in a year's time. The main reason for the forecast being above the midpoint of the 1-3% target is the housing component (rentals), which is expected to continue rising relatively fast.
Published by Globes, Israel business news - www.globes-online.com - on October 11, 2010
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