Monetary tightening expected to be fairly aggressive

ISRAEL - In Brief 15 Mar 2022 by Jonathan Katz

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Another upside inflation surprise Inflation in February was up 0.7% m/m and 3.5% y/y (accelerating from 3.1% last month), above market consensus of 3.3%. Core inflation (the CPI excluding energy and fresh produce) accelerated to 3% y/y from 2.7%. February’s upside surprise came from basically two items: “travel abroad” which increased by 1.9% (we had expected no change) apparently an immediate and sharp reaction to the cancelling of some travel restrictions; and apparel prices which declined by only 2.6% m/m (much less than the usual seasonality). Apparel prices are still down 5.5% y/y, much less than the US and EU. As expected, the CPI was impacted by a 3.5% increase in electricity prices and 5.4% increase in petrol prices. Prices of vehicles increased by 0.7% (slowing from a more rapid pace in previous months), and furniture and appliances increased by only 0.1% m/m.Food prices increased by 0.6% (up 6.1% y/y). Housing purchase prices (a separate survey not factored into the CPI) increased by 2.1% m/m in the last survey and by 13% y/y (up from 11.4% last month).The Bank of Israel has tried to make the case that this isa supply problem, but this price acceleration will be cause for concern and a growing consideration for monetary policy. Implications for monetary policy: Clearly, a rate hike on April 11th is to be expected, and we think we may see a series of rate hikes: at the end of May and in early July as well. We doubt the MPC will “pause” with inflation y/y expected to move even higher and reach around 4.5% by May and remain elevated for most of 2022. Granted, much uncertainty remains regarding the hostilities in Ukraine and the impact on commodities, but neverth...