Markets will react to the rate decision bias

ISRAEL - In Brief 02 Apr 2023 by Jonathan Katz

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We currently expect a rate hike of 0.25% today (Monday) Inflation has remained sticky, surprising on the upside, and broad-based. Economic activity appears resilient (for now) and the labor market fairly tight. The BoI annual report noted that inflation being impacted by demand factors, and less by supply factors. The shekel has weakened by 2.3% against the basket since the last rate decision which will contribute to inflation. The BoI assesses the FX passthrough at 10%-20%. We cannot rule out a more aggressive hike of 0.5%. Our previous call for a 0.5% hike was based on a much weaker shekel (closer toward 3.7/USD). Since then, the shekel has appreciated towards 3.6/USD. The recent decision to delay the judicial legislation and enter into negotiations supported the shekel in the beginning of last week, but since then we have seen some weakness. A 0.5% hike would be supported by concern regarding financial instability. This is not our base call as the level of present policy rates is already restrictive. Markets will react to the BoI macro forecast, rates especially The previous forecast in early January envisioned rates at 4.0% in Q423. This will most likely be revised to 4.75% by Q124. The growth forecast will most likely be revised downwards, and the inflation forecast upwards, at least for 2023 towards 3.5% (from 3.0%). Politics: Demonstrations continue despite the commencement of negotiations held by the President. We have seen demonstrations by the right-wing coalition supporters as well, some turning violent. There is much distrust on both sides. FX: The shekel initially strengthened following the announcement to pause legislation in favor of negotiations on Mond...