Markets will be following fiscal policy closely

ISRAEL - In Brief 08 Jan 2023 by Jonathan Katz

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9.1.23 The Bond market: The S&P analyst in charge of Israel, Maxim Rybnikov, in an interview for Calcalist, expressed concern regarding the functioning of the new government and possible weakening of the judicial system. Political, geo-political and fiscal developments will be followed closely in determining Israel’s rating. S&P expects GDP growth in Israel to reach 2% in 2023, below the BoI forecast of 2.8%. The possibility of some damage to fiscal credibility could narrow Israel’s negative interest rate gap vis-à-vis US Treasuries (10-year). Business sentiment reflects steady growth with some softening ahead Generally, the CBS business survey in December was fairly optimistic. The current situation component reflects steady growth, with the future expectations component modestly weaker. Generally, this positive business sector sentiment supports further monetary tightening. Wage growth in the business sector remains strong Wage pressure remains strong in the private sector, especially in manufacturing, retail trade and construction. Public sector wages remain nearly frozen and await wage agreements in 2023.The expectations for public sector wage increase contributed to the BoI inflation forecast revision to 3.0% from 2.5% in 2023. Monetary policy: Policy rates reached 3.75% last week with a 0.5% hike. The monetary statement was somewhat dovish (compared to previous statements) noting some signs of softer growth, modestly less pressure in the labour market, and some moderation of inflation. Governor Yaron expressed concern regarding fiscal policy going forward. The BoI rate policy forecast is for one more rate hike of 0.25% and then stability for all of 2023. Our revi...