Israel’s Consumer Price Index (CPI) fell by 0.1% in December, bringing the annual inflation rate down to 3%, exactly at the top of the Bank of Israel’s 1-3% target range. Other risks to economic stability, however, remain, such as the depreciation of the shekel and the high fiscal deficit resulting from the war. What do the analysts have to say?
Mizrahi Tefahot Bank chief markets economist Ronen Menachem expected a flat CPI reading for December, and was pleasantly surprised. "The annual inflation rate was 3%, touching the upper limit of the target range for the first time in a long time," he says. "In five out of the last seven months the CPI reading was lower than market expectations or equal to them, so inflation has been continually moderating." Menachem points out that the CPI excluding food and energy prices rose 2% in 2023, so that core inflation was actually in the middle of the target range. Furthermore, "excluding the housing item from the calculation, inflation is slightly above 1%, close to the lower end of the range."
Leader Capital Markets chief economist Yonatan Katz said after the December CPI reading was announced, "The CPI reading was within the range of our expectations, but the items that surprisingly fell were not what we expected. An important item that fell was vehicle insurance. This component always rises by between 1% and 2% a month, and by 20% on an annual basis. This time, however, it fell, which is a change of trend and a positive development." Katz points out that there was a seasonal fall of 8.7% in prices of vacations, and that food prices did not rise. On the other hand, while the rise in rents moderated, there was still a rise, which was unexpected.
The Bank of Israel cut its interest rate by 0.25% earlier this month, but, although the markets are pricing in further cuts, there are factors that will probably prevent the central bank from carrying out further easing of monetary policy. "Despite the low CPI reading, the Bank of Israel will wait with further interest rate cuts in order to examine the fiscal framework and the trend in the shekel, which has depreciated by almost 3% so far this year," Katz says. Katz also stresses that the rise in shipping costs represents an inflationary threat.
Menachem agrees. "The question is whether this CPI reading reflects a slowdown in the economy because of the war, and we will receive the answer to that as time goes on," he says. "Were it not for the question of the fiscal deficit, the depreciation of the shekel, and issues like the effect of the actions of the Houthis on shipping costs, the Bank of Israel would have every justification for cutting the interest rate again next month, but it must be remembered that the CPI reading for January will be published before then."
Menachem adds guardedly that a further interest rate cut by the Bank of Israel cannot be ruled out, and that "the difficulty in estimating what the Bank of Israel’s next steps will be will grow, given the complexity of the situation."
Published by Globes, Israel business news - en.globes.co.il - on January 16, 2024.
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