Israel's central bank held its policy rate steady at 1.25 percent, as expected, in light of the shekel's steady exchange rate, inflationary expectations that are slightly below the midpoint of the central bank's target range and economic activity that is similar to the past two years.
But the Bank of Israel (BOI) also noted that home prices had begun to rise again and mortgages continue to be taken out in large volumes so it would "keep a close watch on developments in asset markets, including the housing market."
Last week the BOI continued its campaign to cool the Israeli housing market, unveiling draft guidelines that cap the share of mortgage repayments out of household income, limits the share of a loan that may have a variable interest rate and bans mortgages in excess of 30 years.
In June banks granted some 5 billion shekels of new mortgages, up from a monthly average of 4.4 billion since the beginning of this year, and the housing component of the consumer price index rose by 1.0 percent in July, up from 0.3 percent in June, for an annual rise of 3.1 percent.
This compares with a 0.3 percent rise in overall consumer price inflation in July from June for an annual rate of 2.2 percent, within the bank's target range of 1-3 percent.
Last month the BOI had taken note of a slight decline in home prices in April-May but it had also said that it was too early to determine if that represented a change in trend.
Inflationary expectations of private forecasters rose slightly to 1.9 percent for the next 12 months while expectations based on bank's internal interest rates eased to 1.5 percent and capital market prices showed unchanged expectations of 1.4 percent, the BOI said.
Expectations for August inflation average 0.4 percent and expectations for the BOI's policy rate one year from now rose slightly to 1.3 percent.
Gauges of economic activity in Israel are being boosted by the recent start of natural gas production, but excluding that effect, the BOI said the economy is expanding at a rate that is similar to the previous two years as higher domestic demand offsets the decline in exports.
Initial estimates of second quarter growth shows Israel's Gross Domestic Product rising by an annual 5.1 percent, boosted by the start of gas production, with private consumption up by 6.7 percent while exports declined by 8.2 percent, excluding diamonds and start-up companies. In the first quarter, the economy expanded by 2.7 percent.
In May the BOI cut rates twice to weaken the strong shekel, but since the bank's last policy meeting in late July, the shekel has remained largely stable, weakening 0.8 percent against the euro. The shekel's effective exchange rate has risen by 5.7 percent against the euro since the start of 2013.
Globally, the BOI said advanced economies continue to show improvement compared "with moderation, and in some cases deterioration, in emerging economies."
"Global capital markets operated under the shadow of concerns over the tapering process and there is still uncertainty about when the process will begin, and its strength, " the BOI said, adding that this uncertainty surrounding the Federal Reserve's quantitative easing policies is "expected to increase financial market volatility."