Morgan Stanley says that the Bank of Israel will be happy - the Consumer Price Index (CPI) for January 2010 was the lowest monthly inflation in 40 months. The Central Bureau of Statistics yesterday announced that the CPI fell by 0.7% in January, more than double the analysts' consensus of a 0.3% drop. Morgan Stanley said that drop was even more that its own forecast of 0.5%.
Morgan Stanley analyst Tevfik Aksoy adds that the drop in the January CPI eased inflation for the 12 preceding months to 3.8%. "While the figure is clearly higher than the 1-3% target range, we expect the base effects to remain dominant until May 2010." The analyst forecasts that, after May, inflation should begin to fall faster. "We should start experiencing a more notable decline in inflation," he says.
"The good news is that the surprisingly low reading is likely to help improve inflation expectations almost immediately, and this should give comfort and confidence to the Bank of Israel."
Aksoy pointed to the drop in housing prices in January, following the drop in December 2009, and said that if housing prices continue to fall, or even remain stable, "a disinflation process will materialize even faster than expected."
Aksoy believes that an interest rate hike for March is "a very low probability". He bases this conclusion on "the tame inflation reading, the high possibility of lower inflation expectations, and especially given the concerns surrounding growth prospects in Europe."
Aksoy reiterated his inflation forecast of 2% for 2010, but given the better than expected CPI in January, he said that the forecast may be skewed downward, and a revision is possible if there are more surprises. He also reiterated his forecast that the Bank of Israel will continue to raise the interest rate in the coming months by as much as 150 basis points to 2.75%.
Published by Globes [online], Israel business news - www.globes-online.com - on February 16, 2010
© Copyright of Globes Publisher Itonut (1983) Ltd. 2010