(photo credit: Courtesy)
For the first time since housing prices began to surge in 2007, a senior
official at the Bank of Israel has expressed concern over a possible financial
crisis should the housing bubble burst.
The official aired his concerns
during the central bank’s narrow-forum discussion prior to setting the April
interest rate, which took place at the end of March and details of which were
released to the public on Monday.
According to the report, “One
participant in the discussion expressed concern regarding financial stability if
there were to be a sudden drop in house prices, in light of the significant
increase in housing credit, although the probability of such a scenario being
realized was low.”
House prices increased by an annualized 16.3 percent
in January, dropping slightly from the level of 17.5% the previous month,
according to the Central Bureau of Statistics. No decline in the volume of new
mortgages was evident, the Bank of Israel said.
The narrow-forum monetary
policy group is one of two groups that Bank of Israel Governor Stanley Fischer
meets with before each interest-rate decision. In the narrow-forum group, four
members of the central bank’s management make recommendations to Fischer on the
appropriate rate of interest for the economy.
At the end of the
discussion for April, all four recommended that he increase the rate by 50 basis
points to 3%, a decision that he accepted, exceeding economists’ expectations
that he would only raise the rate by a quarter-point.
The report showed
that the four members of management discussed whether to accompany the
interestrate hike with macro-prudential measures to reduce the risks in the
Initially, the four were split evenly on whether to
accompany such a measure with a half-percentage-point interest-rate increase or
a quarter-percentage- point increase. However, as it was then decided not to
introduce any macro-prudential steps this month, the two participants who
initially recommended the quarter-percentage- point increase changed their
recommendation to support the half-percentage-point increase.
the housing issue, the group discussed the possible effect on the exchange rate
of an increase in the differential between the interest rate in Israel and rates
abroad, and the path of inflation, which rose by an annualized 4.2% to the end
“Among the factors contributing to inflation were housing
prices (during the last year) and food and energy prices (in the last half
year), factors that are expected to continue to exert inflationary pressure in
the coming year,” the report said.