Despite inflationary threats in the medium term, conditions likely to support rate cut in April

ISRAEL - In Brief 24 Mar 2024 by Jonathan Katz

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In the past week, the shekel strengthened by 1.2 percent against a basket of currencies, but depreciated after the official exchange rate was fixed on Friday. It seems that in the short term, the shekel will continue to respond to the degree of optimism regarding a possible ceasefire. In the past, we emphasized the importance of FX movements, both on the inflation environment and on the interest rate decision. Despite inflation threats from accommodative fiscal policy, expected acceleration in rental prices, and supply disruptions (sea freight, few flights), the Bank of Israel can lower the interest rate to 4.25 percent and still maintain a relatively high real interest rate. In the background, the "dovish" tone from the Fed's direction is a supportive factor In our March 17 forecast, we assumed two interest rate cuts this year (one in April, assuming stability in the exchange rate). This forecast appears still valid. At the same time, it is important to identify potential inflation threats ahead. Labor market data indicate a tightening environment. The customary unemployment rate remained low at 3.3 percent in February. The ratio of demand for workers (the number of job vacancies) to potential supply (the number of unemployed) increased to 0.84 from 0.81 in January and 0.76 in September 23 (and even lower levels in the pre-COVID period). However, this figure does not include about 22,000 people who withdrew from the labor market (stopped looking for work) since September 23 and are likely to return looking for work. Nevertheless, A tight labor market tends to support wage pressures and therefore inflationary pressure as well. Another possible future inflationary threa...