Israeli Protests Ease Prices, Giving Fischer Room on Rates

Bank of Israel Governor Stanley Fischer
Stanley Fischer, governor of the central bank of Israel, center. Photographer: Andrew Harrer/Bloomberg

Israeli consumer protests have helped slow inflation, giving Bank of Israel Governor Stanley Fischer room for further reductions in the benchmark interest rate.

Street demonstrations and boycotts against the high cost of living have prodded companies to bring down prices and the government to look into measures to lower consumer costs. Tnuva Food Industries Agricultural Co-Op In Israel Ltd., which controls about 70 percent of the dairy market, said Oct. 2 it was cutting recommended prices by as much as 15 percent. Competitor Strauss Group Ltd. followed suit. Food costs fell 0.2 percent in August after declining 0.6 percent in July.

“The protests brought down food prices and are also preventing price increases of other products since manufacturers and service providers are afraid of being targeted,” said Victor Bahar, economics department deputy manager at Bank Hapoalim Ltd. in Tel Aviv. “All of this gives the Bank of Israel more room to maneuver.”

Fischer, who had been raising rates for more than two years to battle inflation, reversed policy on Sept. 26 and cut the key rate by a quarter percentage point to 3 percent, citing the worsening global economic outlook. The change came as expectations for inflation, which have exceeded the 1 percent-to-3 percent target range every month this year, plummet.

Breakeven Rate

The two-year breakeven rate, which reflects expectations for inflation over the period, fell for a third day, dropping to 176, implying an average annual inflation rate of 1.76 percent. Inflation in August slowed to 3.4 percent from a high this year of 4.3 percent in March.

The Bank of Israel “has room to ease policy considerably going forward,” David Hauner, head of Eastern Europe, Middle East and Africa economics at Bank of America Merrill Lynch in London, wrote in a report today. Market inflation expectations, which have been the best guide to the Bank of Israel’s rate-setting in recent years, suggest room for further cuts of 50 to 100 basis points, according to the report.

The shekel strengthened 0.2 percent against the dollar yesterday to 3.7544 per dollar. The Israeli currency has weakened by about 8 percent in the past six months.

A decline in global commodity prices and the slowing world economy are also contributing to the decline in the inflation rate, said Alex Zabezhinsky, chief economist at DS Securities & Investments Ltd. in Tel Aviv.

Another Cut

Fischer is likely to cut the rate by an additional quarter of a percentage point by the end of the year, though it may not come in the next rate decision, at the end of this month, Bahar said. Thirteen of 16 economists polled by Bloomberg predict the benchmark rate will remain unchanged, while three predict a quarter-point reduction.

Two-year interest-rate swaps, an indicator of investor expectations for rates in the next two years, were at 2.72 percent today, indicating that another quarter-point reduction is expected.

The benchmark lending rate may fall to 2.5 percent by the end of the year, Goldman Sachs Group Inc. said Sept. 27, while Citigroup Inc. forecast another quarter-point cut this year.

Protesters targeted the cost of cottage cheese in June and a month later more than 100,000 people had joined a Facebook page calling for a boycott of the product. The protest inspired consumer actions against the cost of diapers, baby formula, breakfast cereals and other consumer products.

Tent Camps

Demonstrators later set up tent camps in the center of several cities to protest what they said was unaffordable housing. Prime Minister Benjamin Netanyahu on Sept. 4 vowed to ease the cost of living after mass rallies brought about 400,000 people into the streets.

Netanyahu appointed a panel led by economist Manuel Trajtenberg to draft a response to protester grievances. The Cabinet yesterday examined the panel’s proposals, which include easing import restrictions, raising corporate taxes, increasing personal taxes on people earning more than about $130,000 a year and boosting the supply of affordable housing.

Clal Industries and Investments Ltd. and its cement unit Nesher would be “significantly” affected should the recommendations of the committee be adopted, Clal said Sept. 27 in a statement to the Tel Aviv Stock Exchange.

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