Israel inflation rate unexpectedly falls in September, raising odds for rate cut

Annual inflation eases to 3.8% ahead of Bank of Israel interest rate decision next week; war with Hamas expected to affect economy, dampen growth prospects

Sharon Wrobel is a tech reporter for The Times of Israel.

A shopping cart at the Rami Levy supermarket in Modiin on July 21, 2022. (Yossi Aloni/Flash90)
A shopping cart at the Rami Levy supermarket in Modiin on July 21, 2022. (Yossi Aloni/Flash90)

Consumer prices in Israel in September surprised to the downside, the Central Bureau of Statistics said on Sunday, increasing the odds that the Bank of Israel will start to lower interest rates later this month as the war with the Hamas terror group intensifies.

The consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, unexpectedly decelerated 0.1% in September, compared with analysts’ expectations of an increase of between 0.1% and 0.2%, and after rising 0.5% in August.

The September print brings annual inflation over the past 12 months to 3.8%, declining from 4.1% in August, but is still above a government target range of between 1% to 3%. Israel’s annual inflation rate dropped to 3.3% in July from 4.2% in June.

In September, notable declines were seen in the cost of transportation, which fell 1.5%, and food, culture and entertainment components decreased by 0.5%, each. These were offset by price increases of fresh vegetables and fruit, which rose by 4.3%, educational services increased by 1.3%, and home rentals, furniture and home equipment, clothing and footwear, and health costs were up 0.5% each.

Hamas’s  murderous attacks on southern Israeli communities last weekend, which killed 1,300 Israelis and led to a war with Hamas in Gaza, is expected to cause significant damage to the Israeli economy and growth prospects, but could further bring down inflation as consumers tend to spend less and prices begin to fall.

With the lower-than-expected CPI figure for September, economists at the Bank Leumi and Psagot Investment House raised their forecasts that the Bank of Israel will lower borrowing costs at its next monetary policy meeting on Oct. 23 or even earlier if needed.

That’s after the central bank steadily hiked its benchmark interest rate from a record low of 0.1% in April 2022 to 4.75% this year, in a bid to rein in inflation.

“In view of the considerable negative economic impact of the war on the Israeli economy, and taking into account the drop in the CPI index in September, we expect that the Bank of Israel will soon cut interest rates by about 50 basis points,” said Bank Leumi chief economist Gil Bufman.

Psagot chief economist Guy Beitor explained that Israel has entered the war with the Hamas as the growth momentum in the economy weakened in recent months and the high interest burden began to take a toll on households and mortgage holders, while inflation trends have been moderating.

“The war Israel has entered is expected to be long and will take a significant toll on demand in the economy,” said Beitor. “In addition, the government’s financing needs are expected to jump significantly and therefore, in order to maintain financial stability and provide support to households at this time, we estimate that the Bank of Israel is expected to act and lower interest rates.”

Last week, the Bank of Israel announced a plan to sell up to $30 billion in foreign exchange to protect the shekel from collapse shortly after the country formally declared a state of war.

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