0.5% rate hike more likely on Monday

ISRAEL - In Brief 21 Aug 2022 by Jonathan Katz

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A rate hike of 0.5% is expected on Monday for the following reasons * Inflation in July surprised sharply on the upside with core inflation accelerating to 4.7% y/y from 4.1% in June, due mostly to accelerating housing rental prices, as well as travel abroad costs. * Robust economic growth: GDP growth reached 6.8% in Q222 (above expectations) with private consumption up 10.4%, mostly on strong vehicle imports. Excluding import taxes, GDP growth reached 5.0% in Q222. We estimate the output gap at +1.5%. Indicators for July remain strong, according to the CBS Business Survey and improved PMI (up 4.2 points to 56.7). * Tight labor market: Unemployment reached 3.4% in July. Some wage growth is apparent in the private sector, mostly in hi-tech and financials. Job vacancies declined slightly in July but remain elevated compared to pre-Covid. * Housing purchase prices accelerated to 17.8% y/y from 16.1% last month. * On the other hand, inflation expectations have declined, both in the bond market and among the major forecasters, within the target range. According to the BoI, following July’s CPI print, the major forecasters reduced their inflation forecast to 2.5%, down from 3.1% one month ago. * Strong shekel appreciation is also a form of tightening expected to slow inflationary pressure. * A sharper rate hike of 0.75% cannot be ruled out, but the BoI may think that this could sow policy uncertainty and market volatility. * Following today’s rate hike, we envision 3 more rate hikes of 0.25% to a level of 2.5% in Q223. There will not be a press conference this time. Inflation forecast: We are currently forecasting inflation reaching 2.4% in the next 12 months, with housing p...