Israel Inflation Rate Drops to 0.8%, Below Target

Israel’s inflation rate dropped to a six-year low in April, adding to the economic evidence that spurred policy makers to cut borrowing costs yesterday.

Annual inflation slowed to 0.8 percent in April from 1.3 percent in March, the Jerusalem-based Central Bureau of Statistics reported today. That’s in line with the median estimate in a Bloomberg survey of 14 economists and puts inflation below the government’s 1 percent to 3 percent target for the first time since July 2007. Consumer prices rose 0.4 percent from the previous month, as expected.

“There are no inflationary pressures at present except for housing prices,” Victor Bahar, deputy manager of Bank Hapoalim Ltd.’s economics department, said by phone from Tel Aviv. “There is a global effect, there is no inflation in any Western country.”

In an unscheduled move yesterday, the Bank of Israel, led by Governor Stanley Fischer, cut the benchmark interest rate by a quarter percentage point to 1.5 percent and pledged to buy about $2.1 billion by the end of the year, in an effort to tame the shekel’s gains.

The currency has advanced 2.7 percent this year, the second-biggest after Mexico’s peso among the 31 most-traded currencies. The currency strengthened this year as investors were lured by the start of natural gas production and rates more than double the U.S.’s.

Fischer Departure

The Bank of Israel started buying dollars in April for the first time in two years to arrest the shekel’s climb and bolster exports, which make up about 40 percent of Israel’s economy.

The central bank move came a little more than a month before Fischer plans to step down. The former No. 2 at the International Monetary Fund said he was leaving for personal reasons, mostly because his family is in the U.S. and he has achieved many of the goals he wanted to accomplish.

The rate cut came hours before before Israel’s Cabinet approved a spending plan designed to contain the budget deficit at 4.65 percent of gross domestic product this year and 3 percent in 2014.

“The recent agreement on Israel’s 2013-14 budget means that the Bank can convince itself that fiscal policy is at least ’anchored’, and this allows more aggressive monetary policy,” David Lubin, chief emerging-markets economist at Citigroup Inc., wrote in an e-mailed report.

The central bank has gradually reduced the rate from 3.25 percent in 2011, in large part to shore up the economy amid the European debt crisis.

Inflation Expectations

“Domestically, there is more competitiveness, more regulation, cellphone prices fell dramatically in Israel, six months ago preschool became free of charge,” said Bahar. “Food prices have been under pressure since the social protests” of 2011, he said.

Economic growth is forecast to slow to 2.8 percent this year, from 3.2 percent in 2012, excluding first-time natural-gas revenue forecast to add another percentage point, according to the central bank.

Economists’ average 12-month inflation expectations declined to 1.8 percent, the lowest since 2009, according to a central bank survey released March 17.

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

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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