Further significant shekel depreciation could result in BoI intervention

ISRAEL - In Brief 06 Oct 2024 by Jonathan Katz

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Geopolitics: Israel has escalated intensely its attacks on Hezbollah attacking Beirut as well as commencing a limited ground operation. Hezbollah continues to fire missiles into the northern part of Israel. Markets are awaiting Israel’s response to Iran’s ballistic missile attack last week with great concern. Israel will attempt to strike Iran in a way which will minimize retaliation from Iran. Much depends on cooperation with the US. S&P lowered Israel’ rating from A+ to A, maintaining a negative outlook. This downgrade was expected in light of the escalation of hostilities in the North and missile barrage from Iran. The report was generally more upbeat on the Israeli economy compared to last week’s Moody’ report. There was no mention of the domestic problems rather the steady CA surplus, high-tech sector growth and strong FX reserves were stressed. S&P expects a fiscal deficit of 9.0% GDP this year and 6% in 2025 with zero growth this year and 2.2% next year. Consumer consumption declines in August Credit card purchases declined by 3.6% m/m in August. Chain store sales declined by 4.9% m/m. Our main explanation is the escalation in risk regarding escalation in retaliation keeping consumers at home. Nevertheless, wage growth in July remained strong, up 6%-7% y/y. FX: The shekel weakened significantly following the official FX rate on Tuesday towards 3.80/NIS on elevated geopolitical risks vis-à-vis Iran. We could see the BoI selling FX if the shekel depreciates sharply this week. Inflation: Petrol prices declined by 1.8% in October. October’s CPI is expected to increase by 0.5% (3.8% y/y) following 0.1% in September. Policy rate decision: We expect rate stability on W...