Israel's annual inflation rate slipped below 2% in March, registering 1.9% compared with 2.0% in February, according to data released by the Central Bureau of Statistics. The reading was lower than a 2.1% forecast in a Reuters poll and remains comfortably inside the government's 1-3% target range.
Although headline inflation eased, officials and market participants see little immediate reason to change the central bank's cautious stance on interest rates because of a marked rise in global energy prices tied to the conflict with Iran.
The U.S. and Israel commenced strikes on Iran on February 28. That sequence of events was followed by an effective blockade of the Strait of Hormuz by Iran, which precipitated a sharp jump in oil prices. The U.S. has since implemented its own blockade, a development that has amplified energy-related price pressures.
Economists had anticipated that higher energy costs would push the consumer price index up 0.5% in March from February. The CPI increased 0.4% month-on-month, with the strongest price gains in March seen in fresh vegetables and clothing.
On March 30 the Bank of Israel maintained its short-term policy rate at 4% for a second consecutive month. That decision followed two prior reductions in the past year - cuts implemented in January and November that trimmed the rate from 4.5% to 4%.
Bank of Israel Governor Amir Yaron has indicated that the central bank is open to the possibility of one or two rate cuts this year, contingent on how inflation evolves.
Speaking from an industry perspective, Avraham Novogrocki, president of Israel's Manufacturers' Association, urged policymakers to lower rates, citing the shekel's strength. The currency strengthened 0.5% against the dollar to 2.993 - the first time it has dipped below 3 shekels to the dollar since 1995. Novogrocki argued that the smaller-than-expected March inflation rise supports the view that inflation is contained.
"It indicates that industry is absorbing the cost increases and is not passing them on to the consumer," he said. "There is no longer any justification for postponing the move" to cut rates.
With inflation inside the target band but energy costs elevated by geopolitical developments, the central bank faces competing signals: a contained CPI profile on one hand and external energy-driven inflationary risks on the other. Policymakers will be monitoring incoming data closely to judge whether conditions allow for monetary easing later in the year.