Israel's Inflation Drops Into Target Range for First Time Since October

Israel’s inflation rate fell for a fourth consecutive month in April, dropping within the government’s target range for the first time since October.

Inflation slowed to 3 percent from 3.2 percent the month before, the Jerusalem-based Central Bureau of Statistics said today. The median forecast of 10 economists surveyed by Bloomberg was 2.9 percent. In the month, prices rose 0.9 percent.

The slowdown in inflation is unlikely to stop central bank Governor Stanley Fischer from raising the key interest rate by a quarter-point to 1.75 percent on May 27, as forecast by eight of 10 economists surveyed by Bloomberg. He has lifted the rate four times since August because of a pick-up in economic growth. The target range for inflation is 1 percent to 3 percent.

“Even though inflation is down, there are still signs of sticky persistent inflation coming from housing,” said Jonathan Katz, an economist for HSBC Holdings Plc. “Inflation is higher than expected and clearly supports monetary tightening.”

Housing prices rose 4.7 percent in the past 12 months, the bureau said. In the month, they leaped 1 percent.

“You are clearly seeing housing accelerating, and it has to do with the buoyancy of the economy,” Katz said. “Unemployment is coming down. Consumer confidence indexes are showing a high degree of optimism.”

Growth Forecast

The Bank of Israel raised its growth forecast for 2010 to 3.7 percent on April 21 and said the economy will expand 4 percent in 2011. Unemployment will drop to 7 percent from 7.7 percent in 2009, it said. Finance Minister Yuval Steinitz said on May 6 that growth may reach 4.3 percent this year.

Israel’s benchmark TA-25 stock index surged almost 40 percent in the past 12 months, led by Delek Drilling-LP and Avner Oil & Gas Ltd., which more than doubled. The two companies are partners in the Tamar gas field off Israel’s coast.

Inflation has slowed after the government reduced the sales tax and lowered electricity rates. Electricity rates for homes fell by 9.6 percent on Feb. 15, while the government cut the value-added tax to 16 percent from 16.5 percent on Jan. 1, six months after raising it one percentage point.

Consumer prices will rise 2.7 percent over the next 12 months, according to a survey of forecasters published by the Bank of Israel in the minutes of its last rate-setting meeting, released on May 10.

Fischer on March 11 said that he is in the process of returning interest rates to a “normal” level as the economy recovers from the global recession.

“The 1.5 percent rate is so far from equilibrium that they have to get their act together,” Katz said. “After this index, I definitely feel quite comfortable with my way-above-consensus forecast of a 3.25 percent rate by year end.”

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net;

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