Israeli Inflation May Hint at Next Fischer Move: Week Ahead

By Alisa Odenheimer

Sept. 14 (Bloomberg) -- Israel’s August inflation figures may provide a sneak preview for investors eager to learn whether Bank of Israel Governor Stanley Fischer will raise rates again at the end of the month.

Fischer, who became the first central bank governor to lift rates since signs of easing in the global recession began, may decide on a further increase if the inflation rate is higher than expected, said Ayelet Nir, chief economist at Tel Aviv- based Israel Brokerage & Investments Ltd. The components of the August consumer price index, and whether they show demand-pull inflation or one-time, government-initiated increases, will also play a role, she said.

“The difficulty in the decision is that the Bank of Israel is trying on the one hand to avoid high inflation and on the other hand not to harm growth,” Nir said. Growth “is still very fragile so the decision is very, very hard.”

Fischer has been trying to find a balance between unwinding an expansionary monetary policy while containing a shekel rally in a country where exports make up almost half of gross domestic product. The bank said its Aug. 25 decision to raise the key rate by a quarter point to 0.75 percent was aimed at returning inflation to within the target range of 1 percent to 3 percent.

If Fischer raises rates too early he can harm growth, both because it may cause the shekel to appreciate, which hurts exporters, and also because it dampens spending, Nir said. On the other hand, inflation also has repercussions for growth, she said.

Unanimous

The August consumer price index is expected to dip to 3.2 percent from 3.5 percent the previous month, according to the median estimate of a Bloomberg survey of nine economists. The Jerusalem-based Central Bureau of Statistics will report the inflation data at 6:30 p.m. on Sept. 15.

All four central bank officials who participated in the rate-setting meeting last month favored raising the rate, with one of the four supporting a half-point increase, according to the minutes.

“If inflation is as expected or higher, there is a good chance of another rate hike,” said Jonathan Katz, a Jerusalem- based economist at HSBC Holdings Plc., who predicted the last increase. The minutes of the last rate meeting show that the “monetary bias is still toward higher rates.”

Israel’s growth rate is expected to be flat this year, and will rise to 2.5 percent in 2010, the Bank of Israel said Sept. 1. The bank’s previous forecast in April was for a 1.5 percent contraction this year and growth of 1 percent next year.

Water Tax

Much of the rise in the August consumer price index is likely to be due to the government’s new drought tax on water, which isn’t relevant in the interest rate decision, Nir said.

There will also be “demand-based inflation,” she said, citing increases in the consumer confidence index, retail sales and credit card spending. “Part of the price increases are because of this.”

The following is a list of important events in Israel next week:

Event
Q2 current account                             Sept. 14
August CPI                                     Sept. 15
Q2 revised GDP                                 Sept. 16

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