The Bank of Israel just announced that interest rates will remain unchanged this month at 0.5%.
This move had been expected as we have started to see inflation pick up, and the BOI was gun shy about cutting rates even more in the face of inflation.
The January CPI came in with a drop of 0.1%. This marked the 4th straight month of CPI drops. Nonetheless Inflation for the last 12 months came in at 3.4%. While fuel and fruit prices rose by more than 5.6%, clothing and other more basic necessities dropped by more than 9%.
According to Globes: “The Consumer Price Index (CPI) fell 0.1% in January. According to figures released by the Central Bureau of Statistics the fall in the CPI was due to lower prices for clothing and footwear, which were down 10% and 9%, while the price of tomatoes fell by 21%. This was the fourth consecutive month that the CPI has fallen. The fall was within the 0.2% to minus 0.2% range predicted by analysts.”
Even with most commodity and fuel prices dropping at the speed of light, Israel’s CPI for December fell by just 0.1%, far less than the consensus of an expected 0.5% fall. The December reading means that the CPI was 3.8% for 2008, above the Bank of Israel target.
According to a report in Globes: “According to figures released by the Central Bureau of Statistics, the items which showed the most significant price drops in December were energy, with a fall of 5%, and tomatoes, which fell 41%. Other areas with sharp falls included fresh fruits, overseas travel, meat and poultry, cosmetics, furniture, medicines, and glasses. Telephone bills and car prices jumped, and there were also rises in the housing section, and a 12% jump in clothing.”
I would expect that the January ‘09 CPI will drop as well, as the economy has stalled rapidly. i would expect last months rise in housing as well as car prices, to be a one time aberration and if they drop as well, the overall CPI will get a lot closer to the minus 0.5% that analysts had expected for December.
Of late, the Bank of Israel has maintained that due to slowing global growth, they believe that inflation will be kept in check. Many market participants have accepted that view. Now along comes the Economist Intelligence Unit (EIU), and challenges that assumption.
According to a report in Globes, ” ..But the EIU believes inflation in Israel will remain high, and says that “the Bank of Israel’s monetary policy will continue to be contractionary.”
While to many this may seem to be an argument of little importance, it actually may potentially determine the direction of both local interest rates and where the shekel trades in both the near and mid-term.
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Aaron Katsman is Managing Editor of the Israel Opportunity Investor newsletter. He is lead portfolio manager for the Israel Growth Portfolio and Managing Director of America Israel Investment Associates, LLC. For more information, go to www.israelnewsletter.com or call 1-888-327-6179, or email aaron@profile-financial.com.
