The sharp cut of 2% in lending rates and the continued strengthening of the dollar against the shekel have raised the capital market's inflation expectations to 1.5% in 2002.
Prior to the interest rate cut, inflation expectations had been 0.7% for 2002, reflecting the slowdown in the capital market and an anticipated price freeze. The government inflation target is 2% - 3%.
Economists raised inflation estimates following the interest rate cut. Hezi Gutman, chief economist at the First International Bank, estimates that in the coming 12 months inflation will rise 2.6%, compared with the 1.6% forecast prior to the rate cut. The economist believes that inflation in 2002 will climb to 2.8%.