HSBC: Fischer misleading with interest rates

"In contrast to most developed countries in the world, Israel has an inflation problem."

"Governor of the Bank of Israel Prof. Stanley Fischer is misleading the Israeli public by not raising the interest rate," HSBC economist Jonathan Katz told "Globes" today.

Katz added, "Fischer's central argument is that, excluding the tax hikes, inflation was 1.9% since the beginning of the year, the middle of the inflation target range. During 2008, the Bank of Israel took care to stress and focus on core inflation (inflation excluding food and fuel). That was correct, because it is import to isolate exogenous factors to the domestic economy, when it is clear that a change in the interest rate cannot influence the global price of oil and commodities, since we're mainly talking about the commodities items, which are not affected by monetary policy.

"Despite this, the Bank of Israel has stopped publishing core inflation because that apparently no longer suits it, because core inflation was 4.1% in the past 12 months, and was 3% if the tax hikes are excluded.

"In other words, Israel's real inflationary environment is not 1.9%, as the Bank of Israel claims, but close to the upper limit of the inflation target. It seems that Fischer is afraid of continued shekel appreciation and there is still uncertainty about the global recovery."

Katz notes, "In contrast to most developed countries in the world, Israel has an inflation problem, mainly because of the rise in housing prices (10.4% in the past 12 months), which has contributed about 2.2 percentage points of inflation in the past 12 months. The rise in housing prices is inflation for all intents and purposes. It is demand-driven inflation. In addition, the services item (excluding communications) in the Consumer Price Index (CPI) (which have a weight of 27.6% of the CPI) rose by 2.6% in the past 12 months, contributing 0.7% of the rise. Without any effort, we've got 2.9% inflation."

Katz forecasts that the interest rate will rise to 2.5% in a year from now.

Published by Globes [online], Israel business news - www.globes-online.com - on November 1, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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