Despite low CPI print, 0.5% hike in July likely

ISRAEL - In Brief 19 Jun 2022 by Jonathan Katz
May’s CPI came in at the low end of expectation  * Inflation increased to 4.1% y/y from 4.0% in April. Core inflation rose to 3.65% y/y from 3.4%.  * The main inflation surprise came from a lower-than-expected increase in clothing prices. Surprisingly, clothing prices are down 18% during the past three years.  * Housing rental prices (OER) continued to move gradually higher, up to 3.4% y/y from 3.2%. Our inflation forecast stands at 3.5% in the next 12 months, fueled by a tight labor market and wage pressure, public sector wage agreements in 2023 (and a minimum wage hike), higher rental prices, higher food prices and a modestly weaker shekel. FX: The current account surplus remained strong in Q122 (5.1bn USD), similar to 2021 (4.1% GDP), but below Q421. Net FDI reached 2.5bn USD.  * Recently, the shekel appears more sensitive to equity market movement than to macro fundamentals.  * Last week, the shekel weakened by 2.5% against the dollar and by 1.6% against the Euro. Economic indicators continue to point to fairly steady growth  * Manufacturing exports increased by 10% saar in March-May (slowing from 39% in the Dec-Feb, all in dollar terms), imports of raw materials increased by 14%, and machinery and equipment by 37%, while consumer imports increased by 3.3%.  * Consumer confidence improved modestly in May, especially future expectations.  * On the other hand, new home purchases declined by 5.6% m/m in April, future deceleration is expected in the coming as mortgage rates move higher. Monetary policy: Our initial reaction to the lower-than-expected CPI in May was for a low hike of 0.25% in July. Nevertheless, the chance of a 0.5% hike currently appears stronger with ...

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