Inflation expectations on the capital market for the coming twelve months have risen by 0.6% to 1.3%, the Bank of Israel reported yesterday.
Another worrying statistic is that the money supply has jumped by an unprecedented 50% in the past twelve months, following the sharp cuts in interest rates, the Bank of Israel's programs of purchasing foreign currency and government bonds.
Economic theory points to a clear connection between money supply and inflation. Several capital market sources expressed real concern at the figures, and said they feared that by the end of 2010 the Israeli economy would have to cope with rampant inflation.
Furthermore, if the economic plan and the budget are implemented as approved by the government last week, there will be a substantial, though one-time, rise in annual inflation amounting to at least 1.5%.
The fear on the capital market is that the Bank of Israel will once more miss the government's price stability target range of 1-3% inflation, and that annual inflation will exceed the upper limit, despite the deep recession that the world's economies find themselves in.
Published by Globes [online], Israel business news - www.globes.co.il - on May 18, 2009
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