Goldman Sachs says that the sharper than expected drop of 0.7% in the Consumer Price Index (CPI) in January 2010 played a big role in the Bank of Israel's decision to keep the interest rate for March unchanged at 1.25%. Goldman Sachs and most other analysts had expected Governor of the Bank of Israel Prof. Stanley Fischer to keep the interest rate unchanged.
Goldman Sachs says, "The downside surprise to inflation has clearly had an effect on the Bank of Israel, particularly as inflation expectations remain well anchored (between 2% and 2.5%)." The investment bank notes that, at 3.8%, inflation remains above the government's price stability target of band of 1-3%. Both Goldman Sachs and the Bank of Israel expect inflation to fall to within the target range in the coming months. Goldman Sachs expects inflation to fall below 3% as early as June.
Goldman Sachs believes that Fischer will raise the interest rate to 3% by the end of 2010, to normalize monetary policy from excessively accommodative levels (real policy rates remain approximately -1%). However, the pace of the rate hikes could be slower. "The key risks here are a faster pace of disinflation than we currently expect, weak global growth lowering the demand for Israeli exports, and a slower pace of monetary policy normalization in the Eurozone than our European colleagues currently expect."
Published by Globes [online], Israel business news - www.globes-online.com - on February 23, 2010
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