Low CPI and strong shekel likely to support rate stability

ISRAEL - In Brief 18 Jun 2023 by Jonathan Katz

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Inflation in May surprises on the downside Core inflation slows to 4.9% y/y from 5.3% in April. Much of the surprise was due to lower-than-expected seasonal impact. Prices of goods have moderated, while prices of services (including rental prices) have accelerated. We expect inflation to reach 2.7% in the coming year, as domestic demand slows, housing rental prices decelerate and the shekel appreciates modestly. Macro fundamentals remains shekel supportive The CA surplus increased to 5.9bn USD in Q123 up from 4.6bn in Q422. More importantly, the service/trade accounts reflect a steady surplus 3.7bn, similar to that of previous three quarters. Positive trade numbers for April-May point to a lower trade deficit in Q223, which will support GDP growth as well as the CA surplus. Net FDI (2.5bn) remained strong (1.9bn in Q122) while net financial flows turned negative. Macro fundamentals remain shekel positive, assuming the political uncertainty dissipates. We see the shekel reaching 3.5/USD this year. Q123 GDP growth was revised upwards to 3.1% from 2.5% with business sector investment revised higher to 16.1% from 15.2%. So far, growth in Q223 appears steady despite some slowing PC demand. Monetary policy: We expect rate stability at 4.75% through 2023, and then a gradual loosening trend starting in early 2024, with rate reaching 4.0% by year-end. FX: The shekel appreciated sharply last week, by 1.5% against the basket of currencies and by 3.7% in the first two weeks of June, as the political overhaul appears to be no longer an issue. This trend will slow inflation. Politics: Markets continued to react sharply to domestic political news and more volatility is expected in th...