The April Consumer Price Index (CPI) reading, due to be released next week, will be of great interest, in view of the accelerating rate of inflation in the past few months. Among chief analysts at the banks and investment houses, the view is gaining ground that if the CPI rises by 0.5% or more, the Bank of Israel Monetary Committee will decide on a further 25 basis point interest rate rise at its next meeting in two weeks' time. The committee, which raised the central bank's key rate by 25 basis points in November, decided at its last meeting to leave the rate unchanged, but one committee member spoke in favor of a further rate hike at that time.
Inflation in Israel has been on the rise since the beginning of the year, with the last two CPI readings coming in higher than expected. The current inflation rate, measured over the twelve months to the end of March, is 1.4%. If the analysts' expectations of a 0.5% rise in the CPI for April are fulfilled, the annual rate of inflation will reach 1.5%, approaching the midpoint of the government's 1-3% target range.
According to Psagot chief economist Ori Greenfeld, all current conditions, apart from the appreciation of the shekel, support a further interest rate hike. "Inflation has been surprisingly high, the growth figures are expected to be very strong, and even the Fed is signaling that it is in no rush to lower interest rates in the US," Greenfeld says. Nevertheless, Greenfeld points out that the Bank of Israel ascribes great weight to the exchange rate, and therefore puts the probability of an interest rate rise in another two weeks at 50%.
Alex Zabezhinsky. chief economist at Meitav Dash, also believes that "if the inflation rate in the economy continues to rise as it has done in the past year, the Bank of Israel will have no choice but to raise the interest rate - perhaps as soon as at the next meeting." This, he says, is despite the signs of a global economic slowdown, the halting of interest rate hikes by the main central banks, and the strong shekel. A similar view comes from Leader Capital Markets macroeconomist Yonatan Katz, who thinks that initial estimates due to be published by the Central Bureau of Statistics nest week will indicate an annualized growth rate in Israel of 4-5% in the first quarter of this year, and will strengthen expectations of an interest rate rise. As a contrary factor, Katz mentions rising fears of a global trade war, following the rise in tariffs announced by US president Donald Trump.
Ofer Klein, head of the Economics and Research Department at Harel, has a different approach. Klein points out that the high inflation figures create a misleading impression, because they are very much affected by a jump of more than 19% in fresh produce prices. "We have seen no change in prices of basic services, and it would be ridiculous to say that there's inflation here on the basis of melons and kohlrabi," he says.
Furthermore, Klein says, the CPI figures have still not given expression to the recent strengthening of the shekel against the US dollar and other major currencies, which according to him will lead to price falls in many components of the CPI. "An interest rate hike now, contrary to the global trend, will lead to a further substantial strengthening of the shekel, which could have negative consequences for economic activity, particularly for enterprises and exporters operating in outlying areas of the country," he says.
Published by Globes, Israel business news - en.globes.co.il - on May 7, 2019
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