Israel holds rate, too soon to tell if economy has turned

    Israel's central bank held its policy rate steady at 1.75 percent, as expected, saying it is too early to tell whether the economy has turned the corner though it seems clear that the risk of a deterioration in the global economy has declined.
    The Bank of Israel (BOI), which cut rates by 100 basis points in 2012, said inflation still looks to remain slightly below the bank's target range over the next 12 months but cautioned that the rate of increase in home prices has continued to rise and hopefully new guidelines should "moderate the pressure in the housing market to a certain extent."
    Indicators of economic activity in Israel have been mixed, the bank said, noting better expectations and the possibility of an improvement in January.
   However, the BOI said the fourth quarter growth rate was 2.5 percent, below previous quarters, reflecting lower exports and imports and slower growth in consumption and investments, apparently affected by Operation Pillar of Defense.
   "It is therefore too early to assess whether this represents a turnaround in economic activity," the BOI said. In the third quarter of 2012, Israel's Gross Domestic Product grew by a rate of 3.1 percent.

    The inflation rate in January fell to a below-forecast 1.5 percent from 1.6 percent in December and the BOI said expectations for the next 12 months, based on capital markets, are for 2.5 percent. Expectations for BOI's policy rate one year from now are for 1.6-1.7 percent.
    Accommodative policy among central banks in major advanced economies is expected to continue and Europe's recovery is expected to be very slow even if some sentiment measures point toward the possibility of an improvement in the beginning of this year, the BOI said, adding:
    "The improving trend in the global economy continued, and the widespread assessment is that there has been a decline in the probability of occurrence of the risks which generated a very high level of uncertainty last year—the fiscal cliff in the US, a deterioration in the debt crisis in Europe, and a moderation of growth in China."

    Last week the BOI raised the amount of capital that banks are required to hold against most types of home loans, continuing its recent efforts to limit the real estate boom. Over the past five years, credit for housing has risen some 76 percent and the aim of the new guidelines is to bolster banks' capital buffers in light of the increased risks in their housing credit portfolio.
    In the 12 months ending in December, home prices in Israel rose by 6.7 percent, up from a rate of 5.8 percent in November, and growth in the volume of new mortgages also continued.
    The day after last month's BOI meeting, its highly-respected governor, Stanley Fischer, announced he was stepping down on June 30 after more than eight years in his post.

    www.CentralBankNews.info