.The Consumer Price Index (CPI) is expected to fall by 0.3% in January 2005, due to revisions in the weighted components of the index, say investment houses Clal Batucha and Leader, and at the Ministry of Finance. It will be a surprise if the January CPI shows a rise.
The great unknown is how the housing item will affect the updated weighted components of the index.
The government and investment houses predict that the CPI will rise by 0.1% in February, and that it will be unchanged in March. For the first quarter of 2005, a fall of 0.2% is expected.
There are wide differences in inflation predictions for 2005 as a whole. The capital market predicts 2.1% inflation, in the middle of the government's price stability target range, assuming that the shekel-dollar exchange rate stays low and does not exceed NIS 4.50/$.
Clal Batucha predicts 1.6% inflation in 2005, while Leader predicts 2.5%, more than double the 1.2% inflation in 2004.
Opinion is also divided about interest rate policy. There is still a window of opportunity to cut the interest rate by 0.2% at the end of February to an all-time low of 3.3%, although this would be risky.
The interest rate gap between the shekel and dollar is now only 1%. If the Bank of Israel cuts the interest rate by 0.2%, and the US Federal Reserve Board raises the US interest by 0.25%, the interest rate gap between the shekel and dollar will shrink to an unprecedented 0.5%, which would shrink by a further 0.25% at the end of March.
Some sources believe that the 0.2% interest rate cut in January to 3.5% was the last cut in 2005. This will depend on the CPI, developments in the money supply, and especially expectations of interest rate hikes in the US.
Published by Globes [online], Israel business news - www.globes.co.il - on February 14, 2005