Prices in Israel Fall 0.5%, but Economists See No Rate Cut Ahead

Analysts say CPI decline is driven by falling world oil prices, cuts in controlled prices, so Bank of Israel is unlikely to respond.

Emil Salman

Israeli consumer prices fell in January, the fifth time in the last six months, but economists said they didn’t think the Bank of Israel would move to lower its base lending rate anytime soon – a move that would put Israel into the club of countries with negative interest rates.

The Central Bureau of Statistics said yesterday that the consumer price index fell 0.5% in January, slightly less than economists’ forecast for a drop of 0.5% to 0.6%. Not counting housing prices, the decline was a sharper 1.6%.

In January, the biggest decline was a 5.7% seasonal drop for apparel and footwear prices. But the CPI was weighed down mainly by a 3.8% price decrease for gasoline, reflecting further declines in world petroleum prices, as well as a 2.7% decline on the price of water, after the government cut the controlled price.

The exception to the trend of falling prices was housing, where the housing price index – which compared prices for October-November 2015 with November-December and isn’t included in the CPI – rose a preliminary 0.7%. Prices in the final two months of last year were 8% up on a year earlier, the CBS said.

Ilan Artzi, chief investments manager at Hilman Aldubi Investment House, said that even though Israel is experiencing deflation, it wasn’t the sort to concern the Bank of Israel, whose base rate has been 0.1% for most of the last year.

“The bottom line is that the interest rate is expected to stay at the current level for the next few months,” he said. “The Bank of Israel will only consider raising the rate when inflation begins approaching the bottom of the inflation target. Nothing like that is expected to happen before the start of 2017.”

The government’s inflation target is 1% to 3% annually, but the CBS said yesterday that prices have fallen in the last 12 months through January by 0.6%.

Evyatar Ben-David, a macro analyst at the investment house Excellence, said the deflationary trend would continue this month, estimating that the February CPI would be minus-0.3%. He noted the gasoline prices fell 0.9% on Sunday and said the cost of public transportation would be dropping, too.

Housing holds the line on prices

Militating against an interest rate cut is the seemingly unstoppable rise in housing prices, which has been fueled in part by lower mortgage rates that encourage people to buy, said Artzi. In addition, Israel’s low unemployment rate and concern about the financial stability of the banking system all weigh against a rate cut, he said.

Guy Yehuda, senior economist a Psagot Investment House, added that the deflation is being caused by supply-side issues – mainly the plunge in global oil prices – and government-ordered prices cuts.

Even though inflation is still negative, it doesn’t reflect the state of the economy, where consumer spending remains strong. Likewise, the gyrations of world financial markets in recent weeks haven’t influenced Bank of Israel decision makers to consider a rate cut or other measures, such as quantitative easing. Instead, it has illustrated the risks, he said.

Five central banks have negative interest rates, including the European Central Bank, Denmark, Sweden, Switzerland and, most recently, Japan.

“It’s no accident that the Bank of Israel chose to stress in its semiannual report last week the risks of an expansionary monetary policy by using unconventional tools, like negative interest rates,” he said.

Jonathan Katz, chief economist at Leader Capital Markets, said he was concerned about housing prices, whose pace appears to be accelerating. The year-on-year rate of 8% was up from 7.6% in the previous CBS report, while rental prices were up 2.8% versus a previous 2%.

This trend is due to the relatively low level of inventory in the housing market and excess demand, which has been affected by low interest rates and rising average wages,” Katz said. “These developments can only be a worry for the Bank of Israel and will make it very difficult to take additional monetary expansion measures.”