"Was the Bank of Israel's 2009 growth forecast for Israel so divorced from reality that the current update was unexpected?" asked IBI Investment House chief economist Ayelet Nir. Yesterday, the Bank of Israel slashed its 2009 growth forecast to minus 0.2%, signifying a recession.
Nir answered her own question, "No. The Bank of Israel waited for additional macroeconomic figures, which were only published last week, such as the Procurement Managers Index, the Companies Survey, and so on. All them indicate a worsening of the economic situation."
"Globes": What are IBI's forecasts?
Nir: "This isn't a world of certainties, but of uncertainties. The only expectation is of an aggressive interest rate cut. The reduction of the growth forecast strengthens the option of an interest rate cut of 75 basis points."
What about a cut of one percentage point?
"Our models cannot cope with an interest rate environment that we've never been in before. There's an approach which says that it's worthwhile keeping ammunition in reserve for the future, but I ask, "Why?" An interest rate cut only begins to have an effect after nine months, anyway. Therefore, I don’t think that it's necessary to keep the interest rate weapon in reserve. The question is how do we get the interest rate cut to help the public."
Nir notes, "No one can promise that the interest rate will stop at 1% and that's it." This will be the interest rate if Governor of the Bank of Israel Prof. Stanley Fischer makes a 75-basis point cut today. Nir adds, "The faster and harder you act, the greater the effectiveness, provided that you don’t create inflationary pressures."
Nir predicts that the Consumer Price Index (CPI) will fall by 0.7% in January, driven down by prices for fresh fruits and vegetables.
What about inflation in 2009 as a whole?
"We predict inflation of 1.2%."
Published by Globes [online], Israel business news - www.globes-online.com - on January 26, 2009
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