Israel’s Consumer Price Index (CPI) reading for November confounded analysts’ forecasts with a drop of 0.3%. In the twelve months to the end of November, the CPI rose 3.3%, while for the first eleven months of 2023 the rise is 3.1%, only slightly above the Bank of Israel’s target range for annual inflation of 1-3%.
Analysts had expected the annual rate of inflation to rise to 3.5-3.7%. The surprising fall has led to increased expectations that the Bank of Israel will start to cut interest rates, which will assist in the recovery of the Israeli economy from the war in the Gaza Strip.
Mizrahi Tefahot Bank chief markets economist Ronen Menachem says, "The housing item, which was inflationary until three months ago, has since then pulled the rate of inflation downwards. That is the main change. Moreover, the rise in rents in new tenancy agreements has slowed from 8% to under 5%, which indicates that the housing item will remain moderate in the near future as well." This is an important point, since housing (i.e. rents) represents 26% of the general index.
"In the past four months," Menachem adds, "the annual rate of inflation has fallen to 2.3%, and the Bank of Israel said recently that it ascribes importance to this metric."
Leader Capital Markets chief economist Yonatan Katz says that the main surprise in the November CPI numbers was in the overseas travel item, which fell by 5.7%. Katz had estimated a 3.8% fall. In addition, he points out that, despite shortages, fresh produce prices rose by only 0.7%, while services prices (excluding housing) rose by just 0.1% in November, bringing the twelve-month rise down to 4.2%.
The CPI reading is an important indicator for the Bank of Israel’s forthcoming interest rate decision, set for January 1. "The surprising fall in the CPI on November, together with a very dovish tone from the Fed, raises the chances of an interest rate cut at the beginning of January, if the shekel-dollar exchange rate remains more or less stable," Katz says.
The US Federal Reserve, which kept its interest rate unchanged last Wednesday, has signaled to the markets that it is starting to consider a rate reduction in the US, and projects three interest rate cuts next year (one more than in its previous projection in September). The Bank of Israel has traditionally acted in line with the Federal Reserve, and so the expectation of an interest rate cut in the US contributes to local sentiment.
Bank Hapoalim chief financial markets strategist Modi Shafrir agrees that the Bank of Israel will probably cut its interest rate by 0.25% to 4.5% in its next decision. Shafrir adds, however, that despite expectations on the market, which is pricing in an 85% chance of a cut in each of the next two decisions, he believes that the Bank of Israel will not make a further cut in February, although the chances of one have undoubtedly risen.
Menachem, by contrast, says that it must be borne in mind that the Bank of Israel considers other factors besides inflation, "such as shekel exchange rates (which have been pretty volatile since the outbreak of war) and fiscal policy, which is the subject of controversy."
Menachem stresses that, although the CPI reading for November was a pleasant surprise, consideration of all the data will in his view still not make the Bank of Israel rush to cut its interest rate.
The announcement of the interest rate decision on January 1 will include an updated economic forecast, which will give some clue to the central bank’s intentions. In the bank’s macro economic forecast last month, it projected an interest rate of 3.75-4.0% by the end of next year, but market expectations (before the latest CPI figures) are of a steeper fall, to 3.25%.
Published by Globes, Israel business news - en.globes.co.il - on December 17, 2023.
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