No financial risks to low interest rate environment -Bank of Israel

JERUSALEM Mon Aug 4, 2014 5:10am EDT

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JERUSALEM Aug 4 (Reuters) - Israeli policymakers believe borrowers will be able to repay debts when interest rates rise again and that there is no major financial imbalance developing, the Bank of Israel said on Monday.

Citing low inflation and weak economic growth, the central bank last week lowered its benchmark interest rate to 0.5 percent from 0.75 percent, matching an all-time low at the height of the global financial crisis in 2009.

In its semi-annual monetary report, the central bank said one of the risks to financial stability in a low interest rate environment is the stimulation of demand for credit and a fear that borrowers will not be able to repay debt when rates rise.

"In the view of the members of the (monetary policy) committee, the main financial risk originates from the housing market, and steps taken by the Supervisor of Banks in recent years are keeping that risk low," the central bank said.

To combat a surge in housing prices, the banking regulator tightened mortgage requirements and other measures to protect banks and borrowers.

"The effectiveness of these measures can be seen in the reduced risk characteristics of mortgages," it said. "On the other hand, the demand for business credit has not expanded and in general there is no observable financial imbalance in this area."

The central bank said government plans to eliminate the 18 percent value added tax (VAT) for some home buyers had led to reduced demand for housing for the time being.

It "created an incentive for potentially eligible buyers to delay their purchase of a home and it can be assumed that part of the drop in the number of transactions observed starting in March is the result," the Bank of Israel said.

But the drop in the number of transactions started already in January.

"The postponement of purchases reduces short-term demand and therefore can be expected to weaken the forces working to increase prices," it said. "However, it is reasonable to assume that when the plan goes into effect, the pent-up demand will be released and demand will increase." (Reporting by Steven Scheer)

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