Governor of the Bank of Israel Prof. Stanley Fischer predicts a risk of high inflation this year. The prediction is included in the Bank of Israel's inflation report for the first quarter, published today. He notes that the rising salaries and rising prices for goods, food, and fuel worldwide are boosting inflation, preventing a return to the 1-3% inflation target mid-point of 2%, and may compel interest rate hikes.
Fischer adds that, on the basis of trends of the past 12 months, food and fuel prices will rise by over 4% this year. Although inflation in the second half of the year will probably fall within the target range, inflation will return to the mid-point only in a year's time.
12-month inflation expectations through April 2009 are 3.2-4%. On the basis of Bank of Israel models, inflation will be 2.3-3.2%. Respondents in the Bank of Israel quarterly Company Survey predict up to 4% inflation, while analysts predict 2-3.5% inflation.
The Inflation Report adds that the Bank of Israel cut the interest rate and intervened in the foreign currency market on the assumption that inflation would decline back to within the target range as inflationary pressures weaken. The report adds that the interest rate will remain fairly low through the end of the year in order to limit the effect of the global crisis on the Israeli economy. It also notes that the Bank of Israel's direct purchasing of dollars is affecting exchange rates and is creating demand for foreign currency. The report states that Fischer says that it is possible to steadily increase Israel's foreign currency reserves while keeping within the inflation target range and avoiding serious harm to economic activity and output.
Fischer says that uncertainty in the financial markets, economic activity, and inflation grew strongly during the first quarter because of the global financial crisis, which spread from the US to other countries. He noted that this may be the most complicated financial crisis of the past 60 years. Although Israel will be affected by international developments, the impact will be less than for other economies.
The Bank of Israel is generally optimistic. It argues that exports are still growing, indicating that the global crisis has not affected the Israeli economy; there is also no decline in consumption or in high-tech activity; and the financial system has been stable so far. There has been no significant harm to Israeli financial institutions, nor has a liquidity shortage or credit crunch developed. Israel's banking system and investment houses are not exposed to the sub-prime crisis or credit problems, which are the source of the crisis in the US.
Published by Globes [online], Israel business news - www.globes-online.com - on May 5, 2008
© Copyright of Globes Publisher Itonut (1983) Ltd. 2008