In what economists said was a surprise move, the Bank of Israel lowered the prime interest rate Monday by a quarter of a percent. The new rate is 1%. Most economists had expected the bank to leave rates where they were, at 1.25%
According to the BOI, officials felt comfortable lowering the rate because the inflation forecast for the next year is very low. BOI officials expect prices to remain very stable, with inflation at the lower end of the 1%-3% inflationary band the bank considers acceptable. Inflation for the past 12 months has also been lower than expected, the bank said, so stimulating the economy by making money cheaper was unlikely to set off a wave of inflation.
One thing it is likely to set off, however, say economists, is another wave of home buying by investors both local and foreign. With investments set to pay even less now than they had been, investors were likely to direct their cash into vehicles where they were more likely to make money – the stock market and the real estate market.
While the government has no problem with a strong stock market, it has a big problem with the real estate market, which is already very tight. As demand outweighs supply, prices rise, and with demand set to go up even more, economists said, the chances of the government succeeding in lowering home prices anytime soon are not good.