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Israeli Inflation Slows as Economic Growth, Demand Moderate

Israeli inflation eased in June by more than expected to the slowest rate in five years, as economic growth slowed, reducing consumer demand.

Consumer price growth slowed to 1 percent in the 12 months through June, the lowest since Aug. 2007, compared with 1.6 percent the previous month, the Central Bureau of Statistics reported today. The median estimate of 10 economists surveyed by Bloomberg was for 1.3 percent increase. For the month, prices fell 0.3 percent.

Economic growth is expected to decelerate to 3.1 percent this year from 4.8 percent in 2011, according to central bank estimates, as Europe struggles with a debt crisis and the global expansion slows. More than 40 percent of Israel’s gross domestic product is made up of exports, with Europe one of the largest markets.

“It looks like the economy is slowing down,” Victor Bahar, deputy manager of Bank Hapoalim Ltd.’s economics department, said prior to the announcement. “This affects domestic demand, which in turn affects prices.”

The Bank of Israel cut the benchmark interest rate by a quarter percentage point to 2.25 percent on June 25, the first reduction in five months, citing a “high” level of global economic risk.

The International Monetary Fund will cut its estimate for global growth this year on weakness in investment, jobs and manufacturing in Europe, the U.S., Brazil, India and China, Managing Director Christine Lagarde said last week.

Growth Forecast

The Bank of Israel will probably lower its growth forecast as well after the IMF update, said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc. The bank may lower the interest rate by a quarter-point at the end of August, to 2 percent, he said.

Economists’ 12-month inflation expectations fell to 2 percent on average from 2.4 percent the previous month, the central bank said on June 19. The government’s target is 1 percent to 3 percent.

The decline in gasoline prices and mobile phone service costs contributed to the drop in the month-on-month index. Gasoline prices, which are government-supervised, were lowered by 2.9 percent on June 1, to 7.43 shekels per liter for 95 octane fuel, according to the Ministry of Energy and Water Resources website.

Mounting competition in the telecommunications industry has reduced prices for mobile phone services, as new Israeli providers including Hot Telecommunication System Ltd., Golan Telecom Ltd. and Rami Levi Chain Stores Hashikma Marketing 2006 Ltd. began offering packages at reduced costs.

Bahar said consumer prices may pick up in coming months because of increased taxes and higher agriculture prices.

Bank Hapoalim’s forecast for inflation in the coming year, as of June 27, was 1.9 percent.

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