Economists expect negative inflation for April and May
Low inflation environment could prompt interest rate reductions
The average of economists' projections for inflation is -0.15 percent each for April and May. For the next twelve-month period, the economists expect inflation to be 1.1 percent. Inflation projections for 2003 are about 1.8 percent - inside the government inflation target. The investment and retail banks published updates to their inflation projections in the past few days, following last week's publication of the March consumer price index.
Inflation expectations for the coming twelve months derived from bond trading has also dropped sharply and is now 1.8 percent - almost 2 percent below the capital market's inflation projections at the end of March.
The two central reasons for falling inflation expectations are the rapid end of the Iraq war and the sharp 6.7 percent gain of the shekel against the U.S. dollar since February. The decline in inflation forecasts drove Israel's real interest rate up to a high 7.5 percent.
Economists think the high real interest will encourage Bank of Israel Governor David Klein to return to incremental monthly interest rate cuts.
The economists forecast that interest rate gaps between Israel and overseas will remain high and continue to have an impact on the shekel exchange and inflation rates.
In an unusual projection published at the end of the week, Nessuah Zannex forecast two negative indexes of approximately 0.4 percent each, and negative inflation of 0.5 percent for the coming twelve months.
All indicators point to Israel being in a low inflation environment - the drop in global energy prices, the recession, a decline in money supply, reduced consumer spending power and increased competition.
Most economists forecast negative CPIs for April and May. Leumi group investment bank Ofek Securities estimate the April inflation rate at a negative 0.2 percent and that May will see a negative 0.3 percent. Ilanot Batucha expects negative inflation rates of 0.1 percent in each of the next two months, while Bank Hapoalim projects a negative CPI of 0.2 percent in April and positive inflation of 0.1 percent in May.
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