Inflation in 2003 is now expected to be no more than 0.1-0.5
percent. This is so low as to be insignificant. The new,
lower estimates follow the unexpectedly sharp drop in prices
in July of 0.7 percent.
The First International Bank of Israel has lowered its
forecast for the August CPI from 0.3 percent to 0.2 percent,
and its forecast for inflation in 2003 from 0.6 percent to
0.3 percent. Bank Hapoalim has lowered its 2003 inflation
forecast from 0.9 percent in forecast late July to 0.5
percent. On the other hand, it raised its forecast for the
August CPI from 0.1 percent to 0.2 percent.
Most observers predict that Governor of the Bank of Israel
David Klein will cut the interest rate at the end of August
by 0.3-0.4 percent from its current level of 7 percent, and
that the interest rate will be reduced to 6 percent by the
end of the year. The fact that inflation is lower than
expected means that the real rate of interest is higher since
the real rate is the nominal rate minus the inflation. At a 7
percent nominal rate, the real rate is thus well over 6
percent a year. This is very high by historical standards.
If the interest rate is lowered by 0.3 percent in August it
will be a cumulative 2.5 percent drop in the interest rate
since January.
Factors that will raise the August CPI include the
anticipated shekel depreciation that will raise the housing,
transportation, communications, and overseas trips items in
the CPI. The shekel has appreciated about 3 percent in recent
weeks, and most economists expect it to move moderately
higher.
The 0.7 percent fall in the CPI for July was the largest
monthly drop in 44 years. July had the fourth consecutive
negative monthly CPI. Inflation in January-July 2003 was
minus 1.2 percent. Excluding fresh produce the CPI fell by
1.3 percent in this period. This is the lowest inflation
since 1959. The July CPI was also the lowest for this month
since the 1967 recession. It is also the first time since
1967 that the CPI has fallen for four consecutive months.
The fall in the CPI in July was caused by a 13.9 percent
season drop in prices for fresh fruit and a 9.1 percent drop
in clothing prices. Prices for fresh vegetables fell by 4.4
percent, vehicle insurance by 3.6 percent, furniture by 1.6
percent, electricity by 1.2 percent, and apartment rent by 1
percent.
The annual inflation rate is now minus 2 percent, and
inflation for 2003 is well below the government inflation
target of 1-3 percent. A little inflation is considered a
good thing. Last year inflation, at 6.5 percent (mostly due
to the sharp devaluation in the dollar), was much higher than
predicted, and this year it seems likely to be much lower
than predicted. The average rate for the two years together
will be close to the aggregate prediction, but it is probably
more due to siyata deShmaya than central planning.
Experts believe that Klein will still be very cautious in
lowering the interest rate because of the ballooning budget
deficit, and the government's announcement that it will
appoint an advisory committee to the Bank of Israel led by
someone who is known as a strong advocate of lower interest
rates.
The dollar continued to be pegged at around NIS 4.43 to the
dollar. Most economists expected it to stay around there in
the near future.
