A weakening shekel increases the likelihood of another rate hike

ISRAEL - In Brief 10 Sep 2023 by Jonathan Katz

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Business sector optimism remains steady The August Business Tendency Survey points to steady growth (actually accelerating in August) and steady expectations for further growth. The high-tech sector is also reporting expected expansion in exports and employment next month, apparently on the back of a global high-tech pick-up. This survey will give the monetary hawks support for one more hike, assuming the inflationary environment remains elevated. The fiscal deficit reached 1.3% GDP in LTM, up from 1.0% last month. The MoF reported weak tax revenues while expenditures are up rapidly (9.4% y/y). We expect the deficit to reach 1.8% GDP this year, but 2024 will be more challenging. Bond issuance will continue to accelerate. Wages continue to drift higher, up 6.2% y/y in July on the back of a tight labor market. Chain store sales were up 1.5% saar (in real terms) in May-July following growth of 0.6%. This reflects a slight decline per capita. Inflation: Due to the weaker shekel we are revising our inflation forecast up to 3.0% NTM from 2.9% (October’s CPI expected to reach 0.6% m/m). With global oil prices above 90 dollars/barrel and the shekel weaker, we currently expect a 4% increase in domestic petrol prices at the end of the month. This assumes the MoF keeps present excise tax level unchanged. FX: Pressure for shekel weakness continued last week with the shekel falling by 1.3% against the dollar while remaining steady against the Euro. Lower global equity prices technically “forces” institutions to buy FX in order to maintain a steady FX exposure rate. In addition, the domestic uncertainty regarding the judicial overhaul remains an issue with the Supreme Court reviewin...