BoI: Rising energy and food costs to fuel inflation

“Recovery of economic activity and employment that had started in mid- 2009 continued in the fourth quarter of 2010, central bank says.

February 3, 2011 07:44
1 minute read.
The Reading power station north of Tel Aviv.

reading power station 311. (photo credit: Yossi Weiss)

Rising commodity prices likely will boost inflation worldwide, with the higher cost of energy and food being the main concern in Israel, the Bank of Israel said Thursday.

“Recovery of economic activity and employment that had started in mid- 2009 continued in the fourth quarter of 2010, but indications of increased inflationary pressures are evident,” the central bank said in its inflation report for the fourth quarter of 2010.

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Inflation over the previous 12 months increased slightly in the fourth quarter compared with the third, to 2.7 percent. Inflation for the next 12 months will be 2.6%, with the interest rate increasing gradually to 3.3% in the last quarter of 2011, the report said. The central bank raised the base lending rate by 25 basis points to 2.25% last month. The consumer price index rose 0.8% in the fourth quarter.

The increase in energy and food costs was faster than for other items, the report said. Energy and food prices rose 2.8% and 0.7%, respectively, parallel to global markets.

Others challenges confronting the local economy include global uncertainty regarding growth, how some European countries and the US handle their fiscal deficits and how demand for Israeli exports will be affected.

Mortgage lending continued to grow, encouraged by low interest rates, despite tightening guidelines from the central bank that were introduced in May.

Outstanding credit to households increased 4.8% in the second half of 2010, mainly due to housing loans, which accounted for 68% of household credit, the report said. Total new mortgage lending in the second half of 2010 was NIS 25 billion, 23% higher than in the second half of 2009.

“In view of the low-interest environment, which makes leveraging inexpensive and enhances the advisability of investing in houses due to paltry alternative returns, house prices continued to rise swiftly in the second half of 2010, albeit a little more slowly than before,” the report said. “If the precipitous increase continues, it may cause house prices to deviate from the level implied by the fundamentals and then induce a sharp downturn in realestate prices, threatening the financial system with destabilization.”

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