Israel's Consumer Price Index (CPI) for September sprung a surprise by falling 0.3% to 102 points. The Central Bureau of Statistics released the figures yesterday. The CPI fell in August as well, by 0.1%. Israel's economy is essentially in a state of deflation, with the CPI having fallen by 0.3% over the twelve months up to and including September, and by 1.2% if the housing item is excluded.
Notable falls in September were in the fresh fruits item (10.9%), culture and entertainment (1.3%), footwear (1.1%), food (1%), and transport (0.3%). There were rises in fresh vegetables (1.6%) and education services (1.2%). For the year to date, the general CPI, the index excluding fresh fruits and vegetables, and the index excluding energy, have each fallen by 0.3%. The index excluding housing has fallen by 1.4%. The index of owner-occupied housing services fell by 0.1%, but the rentals index rose by 0.2%.
Since July, the shekel-dollar exchange rate has risen by more than 8%, to a level last seen in March 2013. In recent months exports have slowed, and growth forecasts have been disappointing. The ball is therefore in the Bank of Israel's court, and the question arises whether it will come into line with other central banks and cut its interest rate to zero. Governor of the Bank of Israel Karnit Flug gave a hint about her intentions a few days ago in an interview with Reuters TV, when she talked about the possibility of a further interest rate reduction and the use of non-conventional tools in order to bring the rate of inflation back to within the government's target range.
The CPI for September does not fully reflect the indications of a fall in real estate prices in the past month, or the fall in global oil prices which should translate into a sharp fall in the price of fuels in November. Investment house Halman Aldubi says in response to the September CPI reading that in the light of the growing deflationary pressures the Bank of Israel may not stop at reducing the interest rate to zero, and that the likelihood is growing that it will take monetary steps that have not yet been seen in Israel, among them a quantitative easing program to inject liquidity into the cooling economy.
Published by Globes [online], Israel business news - www.globes-online.com - on October 16, 2014
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