Quarter-point rate cut expected from Fischer

By SHARON WROBEL
January 17, 2007 07:33

The December index saw price decreases mainly in furniture and home equipment (0.9%) and fruits and vegetables (0.7%). Communication costs decreased by 0.3%, while clothing and shoes prices increased by 5.5%.

3 minute read.



Analysts and economist alike expect the Bank of Israel will need to continue to lower interest rates at the end of the month by at least one-quarter of a percentage points following four consecutive months during which inflation has fallen at a 2 percent annualized rate. "In the months September to December 2006, inflation fell at a 2% annualized rate and thus we expect that the Bank of Israel will lower interest rates for February by 0.25 percentage points," said Gilad Cohen, economist at Gaon Investment House. "We don't anticipate a sharp rate cut because of the change of the direction of inflation, which is beginning to show especially in light of the appreciation of the dollar (0.5%) since last month's sharp interest rate cut [of 50 basis points]." Monday's publication of the consumer price index for December showed that the index remained steady after declining for three consecutive months, while making 2006 the first year with deflation since 2003, as the shekel appreciated against the dollar and energy prices fell. Consumer prices were expected to drop 0.1% and 0.2% in the month according to market projections. The December index saw price decreases mainly in furniture and home equipment (0.9%) and fruits and vegetables (0.7%). Communication costs decreased by 0.3%, while clothing and shoes prices increased by 5.5%. The figures published by the Central Bureau of Statistics marked the year 2006 as one ending in deflation, with the consumer price index losing 0.1%, and thus failing the central bank's 1-3% inflation-target range. Deflation has caused the Bank of Israel to lower interest rates rate by 1 percentage point to 4.5% since September. The Bank of Israel expects the inflation rate to move back to the lower end of its price stability target range by the end of 2007. All this leads into the question whether Bank of Israel Governor Stanley Fischer will lower interest rates for February at the end of the month, and by how much. "The central bank will need to cut interest rates for February by another quarter-point and in the month after that, in order to reach its target to return inflation back to the mid-point of the price target range of 1 to 3%, after failing to hit the target range in 8 out of 12 months in 2006," said Shlomo Maoz, chief economist at Excellence Nessuah, who projected that the inflation rate would move back into the range to 2.1% by the end of this year. Gaon's Cohen forecast a 12-month inflation target of 1.8%. "Unemployment rates are still high, there is no threat to the growth of the economy and thus there is no reason for the bank not to cut interest rates." According to CBS figures published on Tuesday, unemployment remained unchanged in November 2006 at 8.3% with 235,000 unemployed, the same as in September and October. The unemployment rate was 8.4% in the third quarter and 8.8% in the first half of the same year. Meanwhile, Robert Beange, analyst at Lehman Brothers, believes the central bank needs to cut more aggressively. "The result of such a healthy current account surplus of 5% to 6% of GDP in 2006 has been a strong appreciation of what seems to have been a significantly undervalued shekel," said Beange. "We believe the Bank of Israel does have to worry about the shekel, as pass-through from the exchange rate to inflation is extremely powerful in Israel." Beange noted that last month's rate cut of 50 basis points suggested a more aggressive monetary policy by the Bank of Israel. "We think inflation will be significantly lower than the Bank of Israel's projection," he forecasted. "Our projections suggest that deflation will persist for some time supported by the foreign exchange effect and the recent fall in the crude oil price. We expect another 50 basis points of easing, although too much easing could result in longer-term inflation risks."


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