There was a time when officials at the Ministry of Finance and Bank of Israel would lose sleep over the April CPI figures. Those days are long gone, and for the time being, inflation does not capture the public's attention.
True, the CPI rose 0.9% last month, which was above the highest forecasts, but at the moment inflation stands at 1.7% per year, and at the end of April the CPI is at the same level as at the end of 2009. According to the latest statistics from the Bank of Israel, there is a substantial slowdown in the expansion of money supply, which will contribute to keeping inflation within the official target range of 1-3%. While inflation expectations are close to the upper limit of the target, if the slowdown in growth continues, then inflation will not rise exceptionally and will probably be close to 2% per year.
These figures do not herald any exceptional rise in inflation, and from the Bank of Israel's viewpoint, there is no reason to deviate from its current monetary policy plans. In other words, the rise in the interest rate that Governor of the Bank of Israel Prof. Stanley Fischer is planning, more or less according to the outline he has set himself, will go ahead. If there are no unforeseen changes, then the Israeli economy will end 2010 with an interest rate of 2%, according to current market expectations.
This forecast may not materialize if there is lower than expected growth. Meanwhile, the Bank of Israel is reporting a modest rise in the Composite State of the Economy Index, which hints at the continued growth of the past few months. Only if the CPI returns to negative territory will Fischer re-examine his monetary policy plans. At the moment the chances of that do not seem high.
Fischer can afford to sit back and look around and feel satisfied. The budget is more or less under control and there are no signs of a rise in the deficit above what is planned, while the markets are functioning smoothly and there is no significant appreciation of the shekel in the foreign currency market.
Yes, there is some concern about the figures published by the Central Bureau of Statistics about the performance of the Israeli economy in the first quarter of 2010 but we are still talking about growth of annual growth of 3.3%. Compared with our friends in Europe, Fischer is operating on an island of stability.
The bottom line is that Fischer can carry on undisturbed and without needing to handle a local or imported crisis. It can be assumed that he will time and again stress the importance of correct fiscal policies in setting up this current reality.
So interest rates will rise, inflation will remain stable, the economy will grow relatively slowly and Fischer will continue with his plans.
Published by Globes [online], Israel business news - www.globes-online.com - on May 16, 2010
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