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Optimistic Bank of Israel cuts unemployment forecast

November 4, 2009. Globes: Ran Rimon and Adrian Filut

The Bank of Israel predicts zero GDP growth in 2009 and 2.5% growth in 2010, and cut its 2009 unemployment forecast to 8.1% from 8.5%, in its Inflation Report for July-September 2009, submitted today to the government, Knesset, and the public.

The Bank of Israel states, "The current account surplus and the pressures weakening the dollar worldwide will probably strengthen the shekel." The bank predicts that the current account surplus will total $7.3 billion in 2009, compared with $1.6 billion in 2008.

The Bank of Israel states, "Developments in the third quarter of 2009 bolstered the assessment that there has been a rapid turnaround in Israel's economic and financial environment. In the last quarter of 2008 and at the beginning of 2009 exports and GDP declined considerably, against the background of the global economic crisis, the CPI fell, and share prices and corporate bond prices slumped. At that time the crisis was expected to become more severe, with forecasts of further deterioration in the economic situation. Inflation was expected to be below the target range in 2009 or even negative."

It adds, "The situation began to change gradually at the end of the first quarter of 2009: the turnaround started with the recovery of the financial markets in March, with increases in share prices as well as a renewal of private bond issues; this was followed by an upturn in economic activity in the second quarter, and the rate of inflation increased and reached above the upper limit of the target inflation range."

The Bank of Israel cites some figures to underscore the turnaround: the Consumer Price Index (CPI) rose by 1.3% in the third quarter, an annualized rate of 5.2%, and rose by an annualized rate of 9% in April-August. "The steep price increases were mainly due to non-recurring government policy measures - chiefly an increase in the VAT and a temporary surcharge on water prices in light of the drought - and to increases in the housing component which occurred despite the appreciation of the shekel vis-a-vis the dollar."

The Inflation Report was prepared in the Senior Monetary Forum of the Bank of Israel, headed by the Governor, the forum in which the Governor makes decisions on the interest rate.

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