The Consumer Price Index (CPI) reading for March was an unpleasant surprise for the analysts. The monthly rise in the index was 0.6%, bringing the twelve-month inflation rate to the end of March to 2.7%. The forecast was for a monthly rise of 0.5%, and an annual inflation rate of 2.6%. Nevertheless, the inflation rate is still within the Bank of Israel’s 1-3% target range. The Bank of Israel currently forecasts an inflation rate of 2.8% in a year’s time.
Leader chief economist Jonathan Katz says that, while the March CPI reading was slightly above the average forecast, "the inflation environment is still within the target range. Core inflation rose slightly, from 2.2% to 2.3%, and is close to the middle of the Bank of Israel’s target range."
Katz explains that according to his calculations the surprise in the March inflation figures stemmed from the 7% rise in the price of cigarettes. His forecast for the rate of inflation in a year’s time is 3.3%.
Mizrahi Tefahot Bank chief economist Ronen Menachem points out that March was the second successive month in which the CPI reading was at the top of the range of forecasts or above them, after a long period in which the monthly readings went the other way and came in below the forecasts.
"It’s worth mentioning that the rise in the index was across the board - only the fresh produce item fell, and it’s seasonal - and a third of rise in the general index is attributable to the services item excluding housing, which shows that inflation is still sticky."
Menachem stresses that, after a long period, the trend in the annual rate of inflation has changed direction from a moderating trend to a rise, this time to 2.7%. In his view, inflation over the next twelve months will be 2.9%.
Chen Herzog, chief economist of BDO Consulting Israel, gives a different angle on the CPI. "The main challenge to a cut in interest rates is not inflation but the government’s ability to meet its fiscal deficit target, at the same time as preventing a deterioration in the security situation." He explains that a large part of the rise in the CPI stemmed form the one-time adjustment of the tax on cigarettes and tobacco, which does not reflect inflationary trends, and so is irrelevant to interest rate policy. "Without this item, we would not have seen a rise in the annual inflation rate," he says.
Nevertheless, Herzog points to problems in the housing index. "What is especially worrying is the rise in housing prices and rents, which will weigh on demobilized soldiers and students, who have borne the burden of the war." According to Herzog, the rise in housing costs is a result of the government’s failure to deal with the shortage of construction workers, and it can be expected to become worse following Turkey’s ban on exports to Israel.
The most important question arising from the current CPI figures is what will the Bank of Israel Monetary Committee decide about interest rates at its meeting next month? Since January, the committee has refrained from cutting the central bank’s interest rate, which remains at 4.5%. The Bank of Israel Research Department’s forecast for the interest rate at the end of the year is 3.75%.
Katz believes that, since the April CPI reading will be released before the next interest rate decision, there could yet be changes in committee’s considerations as far as inflation is concerned. In his view, however, the decision will mainly be affected by the assessment of geopolitical risks and the behavior of shekel exchange rates.
Menachem says that the data certainly do not support an interest rate cut in the forthcoming decision, nor does the fact that interest rates in the US are not expected to fall in the near future.
Herzog also thinks that the interest rate will not fall next time around, "but this is not because of the CPI data, but rather because of the government’s failure to fulfil its commitment to reducing the fiscal deficit."
Published by Globes, Israel business news - en.globes.co.il - on April 16, 2024.
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