The analysts are reacting to the publication tonight (Thursday) of the consumer price index, which surprised in August with a rare drop of 0.3%, and puts inflation at an annual rate of 4.6%. Some economists believe that the data will slow down the pace of interest rate increases planned by the Bank of Israel.
“In recent days, the market has seen an increase in expectations that the Bank of Israel will choose to raise interest rates by 0.75%, in the upcoming decision on 3/10. The relatively low figure in today’s index, in this sense, is expected to challenge the pricing in the market of such an increase,” the market economist estimates of Mizrahi Tefahot, Yoni Fanning.
Penning explains the index data mainly in the contrasting effects of the drop in fuel prices – the excise tax on fuel was temporarily reduced by Finance Minister Lieberman, and on the other hand, there was an increase in rent and electricity prices. “The more moderate index in August proves that the jump in the July index was due, to a large extent, to the weakness of the shekel in the recent period, and not to core factors. Looking ahead, we note that already at this stage, the price index of a year ago expresses many of the effects of the exit from the Corona period. In the future, we will expect these effects to come to me Extraction, a move that will function as a moderating factor for inflation. To these will be added, of course, the continued drop in global commodity prices, and the drop in sea shipping prices,” added Penning.
Modi Shafferer, Chief Financial Markets Strategist at Bank Hapoalim, admits that the intensity of the decline in the index beat the early forecasts in the economy: “The index for the month of August fell by 0.3% – slightly below our estimate of a 0.17% decline and compared to the forecasters’ average expectations of a 0.10% decline. Inflation in summary of the last year increased by 4.6%, but it is still significantly above the price stability target of the Bank of Israel.”
Shafferer updates the interest rate forecast following the index and now estimates that the Bank of Israel will not raise the interest rate in the coming months to the level of 3.75%, but will settle for 3.5%. He estimates that next month the interest rate will rise by half a percent, to 2.5%.
However, Shafferer clarifies that the inflation problem is far from resolved: “Despite the drop in the August index, core inflation in Israel remains at a very high level and service inflation continues to be high as well, a fact that supports continued interest rate increases by the Bank of Israel.”
The rate of increase in apartment prices is expected to moderate
Housing prices completed an annual jump of 17.9% in August – the sharpest increase in a decade. However, Shafferer predicts that the prices in the real estate market will cool down next year: “Despite the noticeable moderation in demand levels in recent months and the certain increase in the supply of apartments, their prices continued to rise sharply in the last month – they increased by another 1.3% per month and by about 17.9% in the last year in summary.
“At the same time, a further moderation in demand is expected in the coming year (against the cooling of the high-tech market and the sharp increase in interest rates), combined with an increase in supply (inventory of new apartments and construction starts) and a moderation in the rate of increase in the construction input index (in light of the drop in commodity prices), which supports a considerable moderation At the pace of the increase in apartment prices in 2023,” estimates Shafrir.
Chen Herzog, BDO’s Chief Economist, added that “the August index may indicate a change in the trend of rising prices in Israel and a moderation in the rate of inflation, as a result of global trends of falling prices for goods, shipping and oil. At the same time, the continued rise in housing prices indicates About the ineffectiveness of the interest rate policy alone to deal with the problem of the cost of living and housing prices in Israel.”
Dr. Gil Befman, Leumi’s chief economist, predicts that the index will also reflect a decrease or at least a containment of prices next month. “The September index is expected to be 0.0% to minus 0.2%,” Befman estimated. In his estimation, “the increase rate of the index in 2022 is expected to be about 5% and during the next 12 months the index is expected to increase by about 2.8-3.3%. The Bank of Israel is expected to continue to raise the interest rate in the October decision at a rate not less than 50 bps and the interest rate is expected to continue to rise from the current level of 2% to about 3.25-3.50% in a year.”
Contrary to other analysts, Guy Beit-Or, the chief economist of Psagot Beit Investments, believes that “the August index is not expected to change anything from the point of view of the Bank of Israel”. In his estimation, the central bank will raise the interest rate sharply in October, by 0.75%. “The global developments, and especially the aggressiveness of the world’s central banks, together with the environment of high inflation in the local market, the tight labor market (which we just learned today that the number of vacancies has increased again) and Israel’s solid fiscal situation will allow the Bank of Israel to continue raising interest rates sharply.”
He explains this by saying that “the general inflation, especially the core, continues to be significantly higher than the target and the inflationary risks looking ahead continue to be high. We are informed almost every day in the economic press about significant price increases in the prices of food and other basic products which are expected to be reflected in the index during the months The next ones, probably after the Tishrei holidays.” In addition, Beit-Or estimates that real estate prices will continue to rise “which means that the housing section of the index will continue to climb higher and exert inflationary pressure on the Israeli economy.”