Thursday, August 26, 2010

Real interest rates to stay negative in the coming months

Bank Leumi says in its latest macroeconomic survey that the Bank of Israel will keep the interest rate unchanged for the coming months, unless home prices continue to rise. The Bank of Israel kept the interest rate for September unchanged at 1.75%, even though Central Bureau of Statistics figures show that apartment prices are still rising. The Bank of Israel cited the slowdown in the US economy, which is liable to affect Israeli exports and the economy as a whole. In addition, 12-month inflation expectations have fallen below the 3% inflation target ceiling, enable the central bank to defer more interest rate hikes.

"We believe that the interest rate in the coming months will be kept at its current level, which means a negative real interest rate," says Bank Leumi. "The factor that could bring forward a rise in the interest rate is a further rise in apartment prices, a factor that the Bank of Israel said in its announcement that it will pay particular attention to."

As for the boiling hot real estate market, Bank Leumi says, "July was characterized by a further reduction in the number of privately built apartments sold, alongside a modest drop in the inventory of new homes available for sale." It adds that inventory levels point to over-demand, which leads to continued price rises.

Bank Leumi did not ignore the Bank of Israel's special focus on the real estate market, saying that the interest rate and other monetary tools are key instruments in dealing with the rise in apartment prices in the absence of a substantial increase in supply. "This attention indicates the great importance of developments in this market for the setting of monetary policy in its various aspects," says Bank Leumi.

Source Globes

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