BOI unlikely to shift out of neutral mode despite low inflation

ISRAEL - In Brief 15 Sep 2016 by Jonathan Katz

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Following several months of gradually increasing inflation from -0.9% y-o-y in April to -0.6% in July, August witnessed a reversal to -0.7% y-o-y. The main reason was a moderation in housing prices to 1.9% y-o-y to 2.2% y-o-y. The CPI excluding all energy items turned negative to -0.1% y-o-y from zero last month. The PPI excluding energy is down -1.6% y-o-y following -1.7% last month.The inflation environment remains below the official target of 1%-3%, despite a tight labor market and some signs of wage inflation. Offsetting fairly strong domestic demand has been steady shekel appreciation (with imports making up 23% of private consumption). Increasing competition in the food, communications and travel abroad have dampened inflation during the past year, a trend which is likely to continue in the coming year.The BOI is clearly set in a neutral policy mode and this downward inflation surprise will most likely not alter this, especially with some robust data recently released including the PMI (up nearly 7 points in August on strong export orders) and job vacancies (increasing as well). Nevertheless, with inflation expected to remain below target until the end of 2017 y/y, it is unlikely to expect any rate hike before 2018.