A hawkish message from the BoI

ISRAEL - In Brief 04 Jul 2022 by Jonathan Katz

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Rates up 0.5%, with a clear hawkish tone Today’s rate hike of 0.5% to 1.25% came as no surprise, but the monetary statement and Governor Yaron’s press conference was clearly hawkish. The MPC sees robust growth (“activity at a high level”), a tight labor market (“at full employment environment”), with inflation accelerating, both in goods and services (tradeables and non-tradeables). Business sector wages have accelerated. The BoI macro forecast expects growth to reach 3.5% in 2023 (down slightly from 4% in the April forecast), unemployment low at 3.5%, and inflation at 2.4% in 2023 (3.3% from Q222 to Q223). Policy rates are expected to reach 2.75% in Q223. In the press conference Governor Yaron stressed the resiliency of the economy, having weathered pollical uncertainty for the past few years, so he is not really worried about the short term impact of early elections. The high-tech sector is well diversified and not at all like the doc.com bubble. More importantly, when asked about the pace of further tightening, Yaron’s initial response was to mention that major central banks are “frontloading”, raising rates rapidly to tame inflation. Only later on did he mention that this will depend on the level of economic activity, etc. In our view, Yaron is very much impacted by the Fed’s monetary policy (and other central banks). He mentioned that rapid tightening is necessary in order to prevent “second round effects.” On the other hand, he did say that inflation in Israel is lower than in most countries. At this point, we expect another 0.5% rate hike on August 22th. The Bank of Israel’s rate forecast of 2.75% in Q223 is likely to be reached much earlier. The forward guidanc...