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 gain after Mexico’s peso among the 31 most-traded currencies. The currency strengthened as investors were lured by the start of natural gas production and rates more than double the U.S.’s. The shekel weakened 0.8 percent at 3 p.m. in Tel Aviv.

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 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.

Fischer, who plans to step down in June, 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

Wages have barely kept up with inflation, fuel prices have fallen, greater competition has sent mobile phone prices plunging and preschool fees have been eliminated, so “there are clearly very few signs of inflationary pressure,” said Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc.

The 0.5 percent rise in housing prices in April also moderated to below 1 percent for the first time since October 2012, Katz said.

“Inflation is below the official target so that is rate-cut supportive,” he said. “The main factor in keeping rates stable at least until yesterday was the fear of the housing price situation.”

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.

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