A Central Bank that can live with negative inflation

BLOOMBERG

Israel is experiencing one of the world’s longest streaks of negative inflation. Yet unlike central banks in Europe or Japan, which have lowered interest rates below zero to combat deflation, the Bank of Israel isn’t as worried about the trend.
While these other banks fret about growth, Israeli central bankers say the local economy is healthy and the drop in prices is mainly prompted by one-time government efforts to push down prices and falling crude oil costs worldwide.
“The central bank knows there isn’t much to do about these exogenous pressures on inflation,” said Ofer Klein, head of economics and research at Harel Insurance & Financial Services Ltd.
“On the other hand, going into negative rates territory carries serious risks.”
Prices in February fell 0.2 percent from a year earlier, an 18th month of declines, the Central Bureau of Statistics in Jerusalem said. That compared with a median estimate for a 0.3 percent fall in a Bloomberg News survey. Prices fell 0.3 percent from January.
The bank says inflation will eventually pick up because wages are growing, unemployment is low, and the economy, which grew 2.6 percent last year, is growing at a similar pace.
The Bank of Israel has exhausted its conventional toolkit by cutting borrowing costs to a record 0.1 percent to weaken the export-battering shekel. It’s said it would only take unconventional steps in “extraordinary circumstances.”
One thing weighing against further easing is the price of homes, which has doubled in less than a decade.
On the other hand,
inflation expectations have declined and the country’s effective exchange rate is trading near a record-high, hampering exports that are a main engine of economic expansion.
That prices keep coming down doesn’t trouble the average Israeli. Israel’s cost of living is 20 percent higher than Spain’s and 30 percent higher than that in South Korea, with similar gross domestic products per capita, according to the OECD.
The government started taking action to bring down some prices after hundreds of thousands joined a
summer of protests in 2011 to vent about the cost of everything from housing to food.

“So what if inflation keeps falling?” said Klein. “That means that things like electricity and water are getting cheaper and there is more money for Israelis to consume.”