A week before deciding on the interest rate for September, Governor of the Bank of Israel Prof. Stanley Fischer undoubtedly did not want to see the Consumer Price Index (CPI) rise by 1.1% in July, above the analysts' consensus of 0.9%. The Bank of Israel, which has slashed the interest rate to an all-time low of 0.5% in order to deal with the economic crisis, is now seeing the economy at the cusp of recovery and taxes are rising along with the money supply. Inflation, which a year ago was projected to be around the midpoint of government's 1-3% price stability target, was 3.5% for the 12 months through July.
Meitav Investment House chief economist Ron Eichal says, "This was a difficult CPI. It was not clear how the tax hikes would affect prices in practice, for example, whether the VAT hike would be transferred onto consumers. I thought that the CPI would rise by 1%, so I was not surprised."
Eichal noted that if the tax hikes imposed by the government were excluded, the CPI would have risen by 0.4-0.5%, and were it not for the tax hikes, inflation would be within the price stability target range. Since the tax hikes have a one-time effect on the CPI, he believes that Fischer will ignore it, and continue his growth-promoting monetary policy. He predicts that Fischer will not raise the interest rate before the first quarter of 2010.
"Fischer should ignore the tax hikes, because they're not a permanent factor. Even if he were to raise the interest rate, it wouldn’t help," says Eichal.
Mizrahi Tefahot Bank chief investment strategist Ronen Menachem also believes that Fischer should not raise the interest rate now, although he finds it hard to predict what Fischer will ultimately decide. "It should be remembered that housing for investment is becoming an increasing part of investment portfolios worldwide because interest rates are negligible," he says.
Menachem adds, "The Bank of Israel does not want to raise the interest rate for September and later. We're heading for a period of negligible rises, or even declines, in the CPI. I look more at inflation forecasts for the coming year, not at actual inflation, and inflation expectations should fall to 1% as soon as September. The Bank of Israel doesn’t have to raise the interest rate because the July CPI was expected, and the shekel's appreciation may pull the subsequent CPIs down. An interest rate hike would strengthen the shekel, and the Bank of Israel doesn’t want that."
Published by Globes [online], Israel business news - www.globes-online.com - on August 16, 2009
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