Bank of Israel Governor Wants Builders to Lower Housing Prices

Bank of Israel Governor Professor Amir Yaron announced the third consecutive interest rate cut, lowering the benchmark rate by a quarter percentage point to 3.25%, with the prime rate now at 4.7%. This decision, which surprised some, was explained by Yaron as being based on several factors. He highlighted that inflation is currently below the target at 1.5%, and while expected to rise, it is projected to remain around the 2% target over the next year, even with anticipated fuel price increases. Additionally, Yaron cited weaker economic activity abroad and a strong shekel as enabling factors for the rate reduction.

Addressing concerns that a third consecutive cut might fuel inflation, Yaron stated that the Bank of Israel manages risks and previously maintained a higher rate when necessary. He firmly denied any pressure from the Prime Minister or Finance Minister to lower the rate, emphasizing the professional independence of the Monetary Committee. Yaron also noted that upcoming elections and the subsequent fiscal policy of the next government, which will be known after its formation and likely present the 2027 budget, were considered.

In contrast to global trends where interest rates are rising, Yaron explained that Israel's rate reduction reflects the success of its monetary policy, partly due to its natural gas reserves. He asserted that the Bank of Israel held rates high when needed, allowing for current reductions while other countries grapple with persistent inflation. Yaron does not believe the rate cut will encourage increased government spending, stating that any future government must adopt responsible fiscal policies.

Regarding the defense budget, Yaron stressed the need for efficiency within the security establishment, warning that significant increases would necessitate higher taxes, interest rates, or inflation. He urged the government to limit future financial commitments to allow the next government flexibility.

Looking ahead, Yaron indicated that the Bank of Israel's forecast of the interest rate reaching 3% next year is being updated due to the current pace of reductions, with a revised forecast to be published soon. Concerning the real estate sector, while transaction volumes have increased, Yaron expressed a desire to see builders lower prices further, noting active construction but vowing to monitor mortgage payment defaults.