In a new review on Israel’s entitled “Redecorating monetary policy”, Morgan Stanley analyst Serhan Cevik warns that "While maintaining a constructive assessment of the Israeli economy and the shekel, we have argued that linking the monetary policy stance to currency fluctuations would expose the economy and financial markets to higher volatility."
Cevik notes “Inflation, hidden behind the shekel’s appreciation, has actually moved higher. Currency-influenced Consumer Price Index (CPI) components posted an annualized drop of 4%, while unaffected “domestic” prices recorded a 3% increase. This is why we need to look beyond the headline figure and focus on underlying trends. Although the Bank of Israel has room, for the time being, to keep short-term interest rates at 3.5%, it will start redecorating its monetary policy stance towards neutrality later in the year, in our view.”
As for inflation, Cevik writes, “With strengthening consumer demand, inflation risks will become more apparent. As the shekel’s appreciation comes to end, we will see real economic factors having more influence over inflation dynamics. The Israeli economy has already been on a rapid expansion trend, and now with low interest rates and broadening gains in the labor market, it will keep enjoying a boost from the rise in consumer demand. In the first quarter of the year, for example, real GDP growth reached an annualized rate of 6.3%, thanks partly to an 11.8% surge in private consumption. The latest indicators - ranging from the state of the economy index to wage growth and the consumer confidence index - point to strong performance in the remainder of the year. Indeed, considering the lagged effects of monetary easing - by 200 basis points since last autumn - the rate of economic growth is likely to be around 6% this year, up from 5.1% in 2006.”
Published by Globes [online], Israel business news - www.globes.co.il - on July 3, 2007
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