Fischer: We will intervene to cope with housing market

Bank of Israel Governor says “the Israeli economy is in good shape, but we need to refrain from complacency.”

October 3, 2010 21:32
3 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

The Bank of Israel indicated on Sunday that it will need to intervene by continuing to raise interest rates and taking additional measures if housing starts do not increase and property prices continue to rise.

“The Israeli economy is in good shape, but we are facing a world economy which is in a very complicated situation and therefore we need to refrain from complacency,” Bank of Israel Governor Prof. Stanley Fischer said at a press conference in Jerusalem on Sunday, ahead of the annual meeting of the International Monetary Fund in Washington.

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“The economy grew at 4.6 percent in the second quarter of the year, unemployment has come down to almost the level before the global crisis, to 6.2%, and inflation over the past 12 months has moved to the middle – 1.8% – of the price stability target range [1% to 3%].

However, there is a sharp increase in the cost of housing, and apartment prices are rising, which is having an impact on the consumer price index,” he said.

Fischer added that although there was a slowdown in the rate of increase in housing prices, according to the most recent data from June and July compared with previous two months, and a rise in housing starts, the central bank will continue to closely watch developments in the market and intervene if necessary.

“There are enough examples of crises that began in the housing market, and we will not let it happen in Israel,” he said. “There are initial signs that housing prices are starting to stabilize, but there needs to be a change in the supply side, otherwise it is a problem. If there is no change and housing starts do not continue to rise, the central bank will need to intervene and take additional steps. We prefer the solution to come from the supply side, but if it does not happen we have the tools to cope with the problem from the demand side.”

Fischer indicated that if property prices continue to rise, the central bank will continue to raise interest rates accordingly. Last week, he raised the benchmark interest rate for October by 0.25% to 2%.

Despite increased efforts by the government in recent months to boost the supply of housing through the publication of construction tenders for thousands of apartments, the decline in the pace of the sharp increase in prices has been fairly moderate. Over the past year, property prices have gone up by more than 22%.

In a review of Israel’s economy in light of developments in the global economy, Fischer added that the government’s budget deficit is estimated to reach 4% of GDP or perhaps a bit less.

“The data are very positive, in particular when compared with the global economy. The central bank’s companies’ survey also points to continued growth in the third quarter of this year, and on this basis we raised our 2010 growth forecast to 4%,” Fischer said.

With regard to 2011, the central bank last week cut its growth forecast for the economy to 3.8% from 4% in reaction to lower growth forecasts in the US and Europe.

“It is a small difference,” Fischer said. “There is a lot of uncertainty about the direction of the global economy.

We have not yet completely gotten over the crisis. The environment is not back to pre-crisis levels and does not compare to what it was three or four years ago. In the US, growth is very moderate, and in Europe growth is expected to be slower than estimated.

Therefore we can not say whether our situation will continue to be as good as it is today.”

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