Inflation risks shift from wages to FX volatility

ISRAEL - In Brief 05 Mar 2023 by Jonathan Katz

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Business sentiment remains strong The Business Tendency Survey in February reflects strong and steady growth with some improvement in the expectation components as well. The expectation for change in employment also improved in general, and in the hi-tech service sector (information and communications). Expectations for inflation moved slightly higher to 2.99% from 2.92% last month and 2.87% two months ago. This generally positive survey will support further monetary tightening on April 3rd, although the degree will most likely be influenced by the behavior of the shekel in the coming months. Currently, we expect a hike of 0.5% but cannot rule out 0.25% (if a compromise is reached regarding the judicial measures) or 0.75% if shekel weakness accelerates. Wage growth moderates Data for the end of 2022 points to slowing wage growth with wage growth up only 0.2% saar in Q422 following 3.5% in Q3 and 5.9% in Q2. Slowing wage growth was witnessed in retail, hi-tech and finance. A moderate public sector wage agreement is reached The public sector will receive 11% over five years (with an additional 3% possible) as well as a one-off 6k ILS in April. The work week will be reduced gradually from 42 hours to 40 hours. We view this agreement as generally positive due to its long duration over five years. The bond market continued to sell off last week on the back of increased policy uncertainty and downside risks. Fitch warned of significantly restricting judicial institution independence, but maintained Israel’s credit rating at A+ stable. The rate differential vis-à-vis US treasuries turned positive (at the long end), and could widen further without a compromise. Nevertheless, t...