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(photo credit: Ariel Jerozolimski)
Economists across the board now expect the Bank of Israel to cut its base interest rate by one-quarter of a percentage point after the consumer price index dropped more-than-expected in September.
"The CPI dropped below everyone's expectations so our forecast for the interest rate decision has changed dramatically and we expect it will be cut by 0.25 of a percentage point," said Yoram Gershoni of Green Bull Investments. "The first step will be to bring it in line with the US rate so we don't expect more than that for now."
Gershoni, who last week said he didn't expect an interest rate change despite the strengthening shekel, now says he would expect further interest rate cuts if the CPI is low again for October. He expects rate cuts will continue until the shekel stabilizes at around NIS 4.4 or NIS 4.5 to the dollar.
The shekel closed Monday at NIS 4.265 to the dollar.
The central Bureau of Statistics said Sunday the CPI dropped by 0.9%, its largest margin for one month in 20 years. Prices rose 1.3% from a year earlier down from the August annual rate of 2.2%.
Leader & Co chief economist Jonathan Katz agreed that Bank of Israel Governor Stanley Fischer would cut the rate by a quarter-point when he announces the November lending rate on Monday, but believes a more dramatic move is in order.
"My feeling is that something is needed to jolt the shekel even slightly and agree with calls to drop the rate by 0.50 percentage points," Katz said. "But my experience with Fischer is that he adopts a more cautious attitude and doesn't make extreme decisions in either direction."
Katz explained that the Bank of Israel is aiming to keep inflation at between 1% and 3% and that it is now below 1% for an annualized 2006 while the underlying trend is very low.
"Factoring in the strengthening of the shekel, low energy prices and the impact of the war, we are nowhere near the inflation rate that the bank should be guiding us towards, which is around 2%," he added.
Excellence Nessuah chief economist Shlomo Maoz said 2006 was likely to end with inflation of 0.5% to 0.6% and that the Bank of Israel would be hard pressed to return to its goal inflation level before May 2007.
"According to our valuations, interest rates need to be, in these days, at a level of 4%," Maoz wrote in a research note. "The bank will find it difficult, however, to swallow its pride and will lower it [the interest rate] gradually by 0.25 of a point each time, at least twice to 5% - a quarter percentage point lower than the Fed."
Meanwhile, industry joined the call to lower the rate with Manufacturers Association president Shraga Brosh appealing to Fischer to lower the rate by at least half a percentage point as a means of offsetting the effects of the low inflation and of improving exporters' ability to compete.