·
Between 2004 and 2019, the
interest rate in Israel was lowered from about 9 percent to near zero in view
of the entrenchment of a price stability environment in Israel.
·
Prior to the Global
Financial Crisis that began in 2008, increases in the interest rate moderated
the growth of credit.
·
The study found that
following that crisis, lowering the interest rate had a marked effect when
combined with macroprudential measures, particularly in the housing market.
A new study published today by the Bank
of Israel Research Department examines the effect of monetary policy and the
macroprudential measures taken in Israel between 2004 and 2019 on bank housing
credit, consumer credit, and business credit.
Figure 2 below shows the development of credit in these segments.
This study was conducted as part of an
international project (IBRN), in which researchers from a large number of
central banks around the world, led by the Federal Reserve in the US and the
Deutsche Bundesbank in Germany, carried out similar studies in their
countries. The findings were shared
among the participants and were analyzed jointly. The aim of the project is to examine the
effect and effectiveness of monetary policy and macroprudential measures on
credit, and thereby to formulate insights for policymakers based on
international experience.
During the period included in the
study, the Bank of Israel interest rate was lowered from about 9 percent to near
zero, with some volatility during the period (Figure 1). This decline took place in parallel with the
entrenchment of a price stability environment in Israel. In addition to monetary policy, the Bank of
Israel implemented macroprudential measures intended to minimize the risks to
the financial system. For instance, it
implemented restrictions on borrower groups, restrictions on the share of bank
financing in the purchase of a dwelling (LTV), restrictions on the portion of
housing loans taken at variable interest rates, capital requirements from the
banks, and so forth (Figure 1). All in
all, the Bank of Israel adopted 20 measures defined as macroprudential measures
during the study period. Most of them
were aimed at credit in the housing market, while others related to the banks’
capital (mainly under the Basel III rules) and limiting exposure to borrower
groups. (The full list appears in Table
1 in the study.)
The study found that the
macroprudential measures and monetary policy had an impact on every component
of bank credit, particularly housing credit and credit to businesses. The
macroprudential measures aimed at the housing market reduced the growth of
housing credit, while contributing to the growth of business credit. Other general macroprudential measures
(capital requirements from the banks) slowed the growth of business credit, but
the effect was as expected with a relative lag, apparently due to the time
frame given to the banks to complete the adjustment of capital and risk assets.
An increase in the Bank of Israel
interest rate had a statistically significant negative impact on the growth of
credit. However, this effect was found
to be significant mainly before the Global Financial Crisis of 2008. Following 2008, it seems that the effect of
interest rate policy (which was mainly lowered) contributed to an increase in
consumer and business credit, but the effect was found to have statistical significance
only when combined with the macroprudential measures that were taken,
particularly in the housing market.
The study also found that the Federal
Reserve’s policy was negatively correlated with domestic
credit in Israel (lower interest rates contributed to an increase in Israeli domestic
bank credit), hinting that the Fed’s policy was perceived as a leading
indicator of monetary policy in Israel.
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