Israeli Consumer Prices Declined More Than Expected in January

Israeli consumer prices fell more than analysts expected in January as a drop in owner-occupied housing costs led price declines in almost all index categories.

Consumer prices dropped 0.6 percent in the month, the Jerusalem-based Central Bureau of Statistics said today. The median forecast of economists surveyed by Bloomberg was for a fall of 0.3 percent. Annual inflation slowed to 1.4 percent from 1.8 percent.

The Bank of Israel monetary policy committee, led by Governor Karnit Flug, held the benchmark interest rate for a fourth month at 1 percent at the end of January, the lowest since 2009. The bigger-than-expected decline in inflation isn’t likely to trigger a rate cut, Tevfik Aksoy, Morgan Stanley’s London-based chief economist for Europe, the Middle East and Africa, said by e-mail. Aksoy said he expects the benchmark to remain unchanged for a “while” before it is eventually raised.

“The main source of concern is not the CPI, but house prices, and the Bank of Israel won’t want to add fuel to an already hot market,” said Aksoy. “This might only change if we get a few more surprises like this one and the headline inflation rate moves below the lower limit of the inflation target band.”

Property prices in Israel are about 25 percent above their equilibrium and there is a 20 percent chance of a housing bust that may lead to a recession, the International Monetary Fund said in a Feb. 12 report. A combination of low mortgage rates and supply shortages have combined to fuel housing prices, the IMF said.

The Bank of Israel has mostly kept interest rates low since the global crisis of 2008 in a bid to boost the economy. Investors have increased demand for housing, even as a shortage of land in large metropolitan areas and delays in planning have constrained supply. Housing prices have jumped 80 percent in nominal terms since 2007.

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