0.5% hike expected today; markets will follow the BoI macro forecast closely

ISRAEL - In Brief 03 Jul 2022 by Jonathan Katz

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Macro factors support more aggressive tightening: Core inflation accelerated to 3.65% y/y in May from 3.4%. Inflation expectations one year ahead in the bond market are over 4%. Economic growth appears fairly steady, with private consumption expanding (credit card purchases up 6% saar in March-May), trade data pointing to growth, and business expectations positive. The labor market continues to tighten and returning to full employment. Wage pressure is apparent in the business sector; pressure for public sector agreements is also accelerating. The shekel has weakened by 3% (against the basket) since the last rate decision. Housing prices are up 15.4% y/y, demand for mortgages has slowed only modestly. Most central banks are tightening significantly, the Fed especially. No less important for markets will be the BoI macro forecast and Yaron’s press conference. We expect an upward revision in the rate forecast (most likely to 2.25%-2.5% one year from now, previously 1.5%). Inflation: Energy prices are pushing higher. Petrol prices increased by 4.7% on July 1st, although the MoF is promising an additional reduction of the tax on petrol in August. Electricity prices are expected to increase as well, due to the spike in coal prices. Food prices in Israel (up only 5.6% y/y) lag most developed countries, and we expect some “catching up” in coming months. FX: Last week, the shekel weakened by 2.4% against the dollar and by 1.7% against the Euro. The shekel remains highly correlated to sharp market corrections. We revised our forecast for July’s CPI up to 0.9% m/m (5.1% y/y) due to shekel weakness, higher petrol prices and likely higher electricity prices. The bond market: We no...