The 0.4% gain by the consumer price index in August is the first sign that inflation has plateaued, said First International Bank of Israel chief analyst Hezi Gutman.

"The CPI's 0.4% drop in August is the first real indication that the pace of inflation has stabilized," Gutman wrote in the bank's weekly report, released today.

"If the estimate of roughly zero inflation in September proves true, then it can be said that the (shekel's) rapid devaluation in the first half of the year did not push inflation up a step," he added.

The working assumption is that the Israeli economy is gradually returning to an annual pace of 2% inflation a year, barring extreme changes in the shekel's exchange rate.

TheStreet Recommends

He expects the Bank of Israel to lower key lending rates from 9.1% by 0.2% in October, and again by 0.2% in November.

He expects that the persisting hi-tech crisis, which is making it hard for Israeli companies to raise capital abroad, will continue to press on the shekel. The Bank of Israel for its part will ensure that the shekel's devaluation does not happen too rapidly. Under those conditions, Gutman sees the annual pace of inflation at 4%.

There are several indicators that do not signal a rally any time soon - including the drop in private consumption, and in industrial exports, he says.

Gutman is maintaining his growth forecast of 2% for 2003, which is largely based on an optimistic assumption of a global economic rally.