Israeli Consumer Prices Fell 0.7% in February

Deflation likely to support further Bank of Israel rate cut, say economists.

Tomer Appelbaum

Israeli consumer prices fell 0.7% in February, a sharper drop than economists had expected. It leaves the consumer price index down an unprecedented 1% over the last 12 months, the Central Bureau of Statistics reported on Sunday.

Many economists said the figure may cause the Bank of Israel to lower its key lending rate again, after a surprise cut last month to a record low 0.1%. The February CPI was at the top end of forecasts for a decline of 0.6% to 0.7%.

Prices for electricity plunged 9.9% after a government-ordered rate cut, while those for fuel fell 3.2%, the CBS said.

One surprise for economists was that home prices were stable in February, reducing the rise over the last 12 months to 4.5% from 4.7% in January. The price of the average home sold in December 2014 and January 2015 was 0.8%lower than in December and January 2014, the CBS said.

Nevertheless, economists said that February’s deflation was likely to be the last in a string of negative consumer price indices and that prices would begin rising gently over the next few months.

“The sharp drop in the February index is mainly due to declines in the price of gasoline last month, lower electricity rates and seasonal factors that generally cause low inflation during the winter months,” said Ori Greenfield, chief strategist at Psagot Investment House.

Deflation like the kind Israel and much of Europe is experiencing now is often associated with an economy skidding into a deep recession, as lower prices cause consumers and business to put off buying and investment. But in Israel, economists said, that is not the case.

“While the feeling is that deflation is growing worse in Israel, there’s no cause for alarm because the deflation is mainly due to temporary factors,” said Greenfield.

Jonathan Katz, chief economist at Leader & Company, said the Bank of Israel would probably be lowering interest rates again as well as other measures known as quantitative easing. Against the basket of currencies, which is what the central bank looks at in terms of rate policy, the shekel has appreciated 2% since the start of March.

“It’s reasonable to assume that there’s pressure on the Bank of Israel to stop the trend by another rate cut and perhaps by using other tools. The low February CPI supports further monetary expansion,” Katz said. “It’s likely the Bank of Israel will lower the rate below zero next week.”