IBI Investment House Ltd. (TASE:IBI) expects that Governor of the Bank of Israel Prof. Stanley Fischer will keep the interest rate unchanged at 1.5% for August, and reiterates its forecast that the Consumer Price Index (CPI) will rise by 0.8% in July.
IBI says that, on one hand, Fischer faces a rise in inflation expectations and rising home prices, which are countered by rising uncertainty about the global growth rate and signs that Israel's growth rate is slowing. Domestic and international factors therefore lean toward keeping the interest rate unchanged, and last week's macroeconomic figures reinforce this position. Domestic economic activity points to a slowing of Israel's growth rate, including industrial output and sales and services proceeds. A drop in the unemployment rate was the only positive signal - but it tends to lag the other variables. The Bank of Israel's Companies Survey for the second quarter and the Combined State of the Economy Index for June both point to slower growth.
IBI notes that the July CPI is affected by seasonal factors, including higher prices for books following the discounts for Israel Book Week, and especially higher prices for foreign travel and summer vacations. These factors are partly offset by lower seasonal prices for clothing and footwear. The tax hikes on cigarettes and higher government-controlled prices for water and fuel, as well as a rise in the housing item of the CPI will also have an effect.
IBI expects 2.9% inflation over the next 12 months, assuming that a slowdown in economic activity will ease inflationary pressure.
IBI specifically points a report by "Globes" about the decision by Israel Electric Corporation's (IEC) (TASE: ELEC.B22) board of directors last week to call for an immediate 16% increase in electricity rates in real terms, as recommended by the World Bank. At the same time, Minister of National Infrastructures Uzi Landau will ask Prime Minister Benjamin Netanyahu and the cabinet to immediately implement the World Bank recommendations.
IBI says that a 16% hike in electricity rates for households is not part of its calculations, and would add 0.4 percentage points to the annual CPI.
Published by Globes [online], Israel business news - www.globes-online.com - on July 26, 2010
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