Conditions support steady aggressive tightening

ISRAEL - In Brief 12 Jun 2022 by Jonathan Katz

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We expect May’s CPI to reach 0.8%, at the high end of consensus • We expect higher prices in food, apparel, travel abroad and housing. • Inflation is expected to accelerate to 4.4% y/y in May from 4.0% in April. • Inflation y/y is expected to continue to move higher towards 5% in coming months, supportive of steady tightening. Macro conditions support tightening: • Unemployment declined to 3.4% in the 1st half of May, the employment ratio is back to the pre-Covid level. • The business tendency survey points to steady growth and more importantly: improving expectations for growth in the next three months. • Businesses are expecting inflation of 2.47% one year from now, up from 2.25% last month. • Fiscal data point to strong domestic demand with domestic VAT expanding. • On the other hand, Israeli departures abroad surged in May, supportive of somewhat weaker domestic demand. Monetary policy: We note that the last rate decision for a 0.4% hike, which surprised the market on the aggressive side, was a unanimous one (similar to the previous rate hike). The doves are in hiding, and it appears that Governor Yaron is very much influenced by global monetary policy. • We currently see a strong case for a 0.5% rate hike on 4th of July, if May’s CPI does not surprise on the downside. • With inflation (y/y) expected to accelerate (see chart), the labor market tight, wage pressures apparent and growth fairly robust it is fair to assume steady tightening to 2.0% by end-year and 2.75% one year from now. Fiscal policy: May witnessed a fiscal surplus and the budget is currently balanced in the last 12 months as revenues are up 25% y/y so far this year and non-Covid spending remains wea...