Was the threat of a housing bubble the reason Bank of Israel Governor Stanley Fischer decided Monday to keep March's nominal interest rate at 1.75%? According to most analysts, the answer is yes. The Bank of Israel issued a statement on Monday that elaborated on the decision. It said that despite adverse developments in recent months, new surveys have showed "an improvement in expectations of economic activity in the business sector, and the most recent monthly indicators show a possibility that there was some improvement in January in the rate of activity." The central bank noted that the decision was also influenced by the lack of certainty over the state budget and the new government's policy on the deficit. "Although the Bank of Israel did not specifically say so in its statement, we can surmise that the two primary reasons that the interest rate was left as is were rising housing prices and the lack of a state budget for 2013," saids Ofer Klein, the head of the Economics and Research Department at Harel Insurance Investments and Financial Service. Shmuel Ben Arie, head of Shekel Wealth Management Services at Pioneer Private Wealth Planning, said, "The decision to keep the interest rate unchanged suggests that the BOI's chief concern was avoiding a move that would help create a housing bubble, and as such, was less concerned over any adverse effect the move could have on the economy, such as exacerbating the economic slowdown and possibly sliding into recession." Monday's decision marks the third straight month in which the Bank of Israel has chosen to keep the interest rate unchanged. The interest rate is expected to stay unchanged in April and May as well, as Fischer said he would not change interest rates before Passover. By the end of May, interest rates will have remained unchanged for five straight months. Most analysts believe the potential housing bubble is a source of great concern for the governor and note that his recent decision dovetails with the drastic measures aimed at tempering activity in the mortgage market, announced last week by Fischer and the Supervisor of the Banks at the Finance Ministry David (Dudu) Zaken. "Housing prices are still on the rise and the number of housing starts for new apartment buildings is at its lowest in years," the Bank of Israel noted in its statement. Housing prices surged by 1% in December, and overall by 6.7% in 2012. Over the past five years, housing prices climbed by a total of 73.5%. Israelis borrowed more than 4 billion shekels ($1.07 billion) through new mortgages this month, an all-time high for February. However, some speculate that even the latest move will not cool the housing market. Erez Cohen, a former chairman of the Real Estate Appraisers Association in Israel and the owner of a real estate appraisal company, said, "The decision on the interest rate is just an analgesic that has zero effect on the real estate market, which continues to suffer from severe structural problems such as red tape, a zoning and construction bill that is in limbo, a shrinking supply of plots for development, a credit squeeze for entrepreneurs, a lack of incentives for urban renewal and earthquake fortification projects, and so forth."
