A somewhat hawkish hold by the MPC

ISRAEL - In Brief 06 Jan 2025 by Jonathan Katz
A somewhat hawkish hold by the MPC There were no real surprises in the rate (hold) decision, but the announcement was more hawkish than we had expected. The same inflationary risks were copy/pasted from the last decision: ”there are several risks for a possible acceleration of inflation: geopolitical developments and their impact on economic activity, prolonged supply constraints, volatility of the shekel, and fiscal developments.” The Governor in his press conference was a bit more balanced: “….supply limitations are gradually moderating. In parallel, in the past few months a recovery can be seen on the demand side.” In other words, the Governor sees a balance between less supply constraint issues supporting lower inflation as well as stronger demand supporting inflationary pressure. In a way, this is hawkish as well: the uptick in consumption of durables in November-December is probably mostly due to early purchases before higher taxation. The MPC noted that the labor market remains tight although wage growth as moderated. Generally, the BoI is aware that inflation y/y will accelerate in the 1st quarter and only moderate in the second half of the year (we think earlier) and therefore is expressing a rather cautious monetary stance, especially in light of tremendous geopolitical uncertainty. The BoI macro forecast reflected a stronger growth forecast for 2025 of 4.0% (up from 3.8% in October), a lower fiscal deficit of 4.7% GDP (down from 4.9%) lower inflation of 2.6% (previously 2.8%) and lower rates by end-year to a range of 4.0% -4.25% (currently 4.5%). Our view is more dovish; we expect three rate cuts in 2025 commencing in April, assuming no downside geopolitical...

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