Israeli Inflation Plummets Below Target Range; Rate Hike at Risk

(Bloomberg) -- Israeli inflation slowed much more than forecast, dropping out of the central bank’s target range for the first time this year and endangering its projected increase in interest rates next month.

Consumer prices rose just 0.8% in June from a year earlier, according to the Central Bureau of Statistics. That’s down from 1.5% in May and slower than every forecast in a Bloomberg survey of 14 economists, whose median was 1.2%.

Market Reaction

The shekel weakened after the inflation data on Monday, erasing most of its earlier gains against the dollar. It traded little changed at 3.5473 against the U.S. currency as of 6:58 p.m. in Tel Aviv.

Key Insights

• The deceleration pushed inflation below the 1%-3% target range. Just last week, the Bank of Israel said after its latest rate decision that “it currently seems less likely that inflation will again fall below the lower bound” of the range
• Such a surprise could force the central bank to re-assess its rate path, after the bank’s research division forecast a hike by the end of September.
• Price drops were particularly steep among items including fresh fruits and vegetables, clothing and footwear, furniture and transportation.
• The slowdown also could put a dent in the rally for Israeli assets. The shekel has been a top-performing currency this year and one of the world’s best carry trades, but that could now cool.

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• For more info on the central bank’s latest moves, click here.

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