Merrill Lynch believes in its latest survey that the Bank of Israel will keep the interest rate for October unchanged at 2.25% in view of the recent upside surprises in domestic data together with significant monetary stimulus abroad in the past few weeks.
Merrill Lynch says, "The Monetary Policy Committee (MPC) will likely want to wait to assess any second round effects from the commodity and tax-driven jump in Consumer Price Index (CPI), as well as the impact of monetary easing from major central banks. Still, we believe that the Bank of Israel will firmly hold on to its easing bias amid softening domestic momentum and remaining external downside risks, and thus continue to look for the policy rate to fall to 2% by year end."
It adds, "Inflation will likely remain high in the near term due to a combination of high commodity prices and domestic VAT and excise duties hikes. August CPI accelerated much more than expected, to 1.9% for the preceding 12 months from 1.4% in July, leading to the Bank of Israel Governor voicing his concerns whether this implies a serious change in the underlying inflationary pressures. We believe risks are still contained. The breakdown of CPI reveals that the upward pressures were primarily driven by higher food and fuel prices, as the surge in world commodity prices was exacerbated by the shekel's weakness (oil in shekels rose by 16% over the previous 12 months in August after rising 3% in July). The increase in excise duties on alcohol and tobacco in late July added to CPI upside last month. Overall, food, fruit and vegetable, fuels and tobacco products together contributed 0.7% to the change in the headline rate. We do not see significant inflation risks elsewhere. Meanwhile, the 1 percentage point VAT hike in September likely added up to 0.4% to CPI inflation this month."
Merrill Lynch says that while the second reading of GDP for the second quarter was revised up to an annualized 3.4% growth from 3.2% in the first estimate, up from 3.1% in first quarter, but the breakdown reveals a less upbeat message. "Most of the acceleration from the first quarter and upward revision was in exports (an annualized growth rate of 23.3% from 10.3% in first reading and 2.8% in the first quarter), which was primarily driven by one company’s large transaction, according to the Central Bureau of Statistics." It adds that the Central Bureau of Statistics revised downward private consumption (to an annualized growth rate of 3.9% from 7.1% in the first quarter) and imports (an annualized fall of 14.4% compared with an annualized growth rate of 39.4% in the first quarter). The annualized fall of 0.3% in fixed investment after the annualized 2.2% growth rate in the first quarter underscores the softening in domestic momentum. Merrill Lynch concludes, "Latest survey data do not point to much optimism."
Published by Globes [online], Israel business news - www.globes-online.com - on September 20, 2012
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