Low inflation will allow the BoI to tolerate some shekel weakness

ISRAEL - In Brief 27 Aug 2023 by Jonathan Katz

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Economic indicators have been mixed The BoI Composite Index increased modestly by 0.17%, slower than the pace in 2022, but somewhat faster than the pace earlier this year. Total revenues from the various branches contracted by0.7 % saar in Q2. Manufacturing declined by 1.8% saar with a 3.2% decline in high-tech manufacturing. The PMI in July (48.3 points) continues to point to contraction with export orders weak while domestic orders are expansionary. We note that defense industries are not included in this index for the most part. Employment growth in the prime age group (25-64) was robust in July as the unemployment rate declined to 3.0% from 3.3% in June. Implications for monetary policy: Our view is that the MPC is generally not keen on pushing rates up further. The overriding consideration in next week’s rate decision will be the moderation in inflation, including core inflation (down to 3.6% y/y in July from 4.2%), with the past three CPI prints coming in below or at the low end of expectations. In addition, the committee views present rates as restrictive and has emphasized the negative impact on consumers and the real-estate sector especially. Economic indicators have been mixed and will provide the doves support for a pause decision. In addition, job vacancies have been declining rapidly, despite rapid employment growth. Therefore, a rate pause is to be expected next week, even is the shekel continues to weaken modestly this week. Looking forward, the October 20th decision will depend on the Aug-Sept CPI prints and the direction of the shekel. We note that inflation in September y/y is expected to accelerate to 4.0% (from 3.3% in July) on base effect. At the m...