Further tightening will be data dependent

ISRAEL - In Brief 29 May 2023 by Jonathan Katz

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Rates reach 4.75% with mixed signals Last week’s 0.25% hike was in line with expectations on the back of strong economic activity, a tight labor market and sticky/broad-based inflation above target. Following the rate hike, Governor Yaron was interviewed and conveyed a dovish message stating that the “present monetary policy is restrictive enough” (although not ruling out further tightening). A more hawkish message came from the Deputy Governor Abir in an interview with Bloomberg stating that political uncertainty could lead to further rate hikes and “all options are on the table”. According to Abir, the weaker shekel so far this year has contributed about 1% towards inflation. In short, further tightening will be data dependent with the direction of the shekel a major factor in the rate decision. Inflation y/y is expected to accelerate following May’s CPI print to 5.1% (consensus and our forecast) and even 5.2% (minority forecast) from the April 5.0% level. Therefore, unless the shekel appreciates markedly or the economy slows sharply, it is reasonable to expect another rate hike. FX: The shekel weakened by around 2% (against the basket) last week. What were the reasons? The chief of the Israeli army noted the increased risk of escalation in the region, especially vis-à-vis Iran and its proxy allies. á Netanyahu noted that, even if a compromise is not reached, the judicial overhaul will push forward. It is possible that the disappointing fiscal budget approved was an additional factor, with huge additional outlays to the ultra-orthodox. Politics: The 2023-2024 fiscal budget has been approved in the Knesset, which enables the coalition to remain in power for at least t...