​Despite pressure for shekel appreciation, rate hold decision expected today

ISRAEL - In Brief 25 Jul 2016 by Jonathan Katz

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Pressure for shekel appreciation mounts The shekel has strengthened by 1.5% (against the basket) since 6.7.16. The shekel is 0.3% away from the strongest level seen this year (in May).This is somewhat surprising as Flug views the ILS as too strong.Nevertheless, we expect rate stability today.The MPC has made it clear that FX intervention is the only game in town. The BOI expects growth to improve in Q216 to around 2.5%. Brender (Head of Macro Economics at BOI) sees 2.2%-2.5% as growth potential in coming years as growth of labor force slows.If so, Israel's output gap is close to zero (full employment).This supports some increasing inflationary pressure.One sign of this is the increase in hours worked/employee in industry. The BOI corporate survey points to improvement in Q2. This is on the back of retail, services and construction.Industry is still suffering from net negative balance of orders. The BOI composite index of the economy is up 0.1% m-o-m in June. We have revised our inflation forecast down to 0.8% NTM from 1.0%. This is due to recent ILS appreciation and global drop in oil prices.In addition, we see housing prices increasing by 2.2% (previously 2.4%).This is based on the multi-year downward trend in rental prices y-o-y.In addition, vehicle insurance costs will decline in September as the MOF releases excess insurance premium collection from past years back to the insurance companies.Other measures announced last week include reducing gradually tariffs on imported fish. BOI corporate survey points to some improvement in Q2 -Growth remains dependent on domestic demand and services The Bank of Israel's quarterly corporate survey recorded a moderate acceleratio...