Mortgages to rise substantially after interest rate hike

JP Morgan predicts key rate to reach 5.5% by 2012.

By ADI BEN-ISRAEL/GLOBES
Governor of the Bank of Israel Prof. Stanley Fischer’s decision to raise the interest rate by 50 basis points, to 3 percent for April caught most market players unprepared.
Economists had expected a 25 basis points rise in the interest rate, but Fischer once again took them by surprise and hiked it to 3%. The interest rate in the Israeli economy has risen by 100 basis points in the past three months and by 250 basis points since August 2009.
The significance is that mortgages will now be substantially more expensive.
Foreign banks are rushing to respond and raise their interest rate forecasts.
Goldman Sachs said, “The Bank of Israel will leave the interest rate unchanged when it makes its next interest rate decision on April 24, but the interest rate will rise to 4.25% by the end of the year, and 5.25% by the end of 2012.”
JP Morgan’s economists have issued an even more aggressive forecast, predicting 4.5% interest by the end of the year, and 5.5% by the end of 2012. Thus JP Morgan has raised its previous prediction by 0.5%.
The reason for the announcement of the sharp rise in the interest rate yesterday is the hike in inflation and inflationary expectations.
Over the 12 months ending February 2011 inflation climbed to 4.2%, well above the government's 1- 3% target.
The rise in Israel’s interest rate further widens the interest rate gap between Israel and the US, and this is likely to increase the flow of capital into the Israeli economy and strengthen the shekel.
Consequently, Merrill Lynch economists said the Bank of Israel, “will watch out for the shekel in the next few months possibly through sporadic intervention and macro-prudential tools.”
In an interview with Bloomberg, Modi Shafrir, chief economist at Tel Avivbased I.L.S. Brokers Ltd., said that “the Bank of Israel became much more hawkish.
Due to its increasing confidence in the strength of the local and the global economy, it seems like the Bank of Israel intends to focus, in the upcoming months, mainly on the rising inflationary pressures.”

Bloomberg contributed to this report