The Bank of Israel cut its benchmark interest rate to a 22-month low and set limits on mortgage spending in an effort to counter slowing economic growth without fueling a housing bubble.
The monetary policy committee, led by Governor Stanley Fischer, cut the rate by a quarter-point to 2 percent, the Jerusalem-based bank said on its website today. None of the 24 economists surveyed by Bloomberg predicted the decision.
“Surprise is an understatement in this decision,” Yaniv Pagot, chief strategist at the Ramat Gan-based Ayalon Group Ltd., said by telephone. “Like everyone else, my jaw dropped.”
The Bank of Israel, which joined central banks from South Korea to Brazil in reducing lending rates this month, has gradually reduced the benchmark from 3.25 percent in September 2011 in an effort to shore up the economy amid the European debt crisis and a global slowdown. Growth is expected to slow to 3.5 percent this year, from 4.6 percent last year, according to the Jerusalem-based Central Bureau of Statistics.
“For a few weeks they have been telling us that they want to cool down the housing prices and then they cut the rates,” said Pagot. “It’s the timing that is the most strange.”
The central bank also released, together with the rate decision, new draft directives aimed at damping the housing market that are scheduled to take effect on Nov. 1. Housing prices have increased by about 20 percent since the beginning of 2010, according to Central Bureau of Statistics figures.
The directives limit mortgages to 70 percent of the value of the home, with the exception of first-time buyers, who will be permitted to borrow as much as 75 percent. Mortgages on houses purchased as an investment will be limited to 50 percent of the value.
“The Bank of Israel decided to fight the price of housing by restricting mortgages and therefore canceling out the impact of the lower interest rate on housing prices,” said Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd. “Bank of Israel is dovish on the future of the local economy and the global economy and therefore, in a surprising move, decided to be ahead of the curve.”
The shekel weakened to 3.9160 against the dollar at 6:35 p.m. in Tel Aviv after trading at 3.8815 before the announcement. It was trading at 3.9105 at 6:52 p.m.
“It’s the Fischer effect,” said Tevfik Aksoy, an economist at Morgan Stanley. “He does this every once in a while, when nobody expects it.”
The level of economic risk around the world remains high and domestic growth may be slowing, the central bank said in explaining its decision to cut the lending rate. Exports make up about 40 percent of Israeli gross domestic product.
“Indicators which became available this month continue to strengthen the assessment that there has been some moderation in the growth rate to about 3 percent,” the central bank said. “Expectations seen in consumer surveys and the Business Tendency Survey are pessimistic and indicate predictions of further moderation in activity.”
In addition, the economy is expected to be affected in the first few months of 2013 by the fiscal restraint inherent in limitations on monthly government expenditure until a new budget is approved, the bank said.
Inflation accelerated to 2.1 percent in September, less than forecast, from 1.9 percent the previous month, the Central Bureau of Statistics reported Oct. 15. The government’s target range for inflation is 1 percent to 3 percent.
Consumer prices will probably rise 2 percent in the next 12 months, according to a survey of economists released by the Bank of Israel on Oct. 17, compared with 2.6 percent in September.
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