Monetary tightening to persist, despite temporary low inflation in August

ISRAEL - In Brief 31 Jul 2022 by Jonathan Katz

---

Inflation: Our inflation forecast for August revised down to -0.1% m/m  * Petrol prices declined by 19% m/m today, due both to lower global oil prices and an additional cut in petrol tariffs. Officially, this tariff reduction is apparently only for one month (contributing -8% to the price change in August), but it is not clear whether this will be extended. We assume it will not be extended.  * In addition, the increase in electricity prices was reduced to 8.6% (instead of 9.6%).  * Last week the shekel appreciated by 1.1% against the basket of currencies and by 4.3% since the beginning of the month. This will impact the “travel abroad” (3.7% of the CPI). Recent economic indicators suggest fairly steady growth:  * Credit card purchases (in real terms) expanded by 3.2% saar in Q2, slowing somewhat from 4.7% in Q1.  * Hi-tech service exports expanded by 6.3% saar in February-May.  * Unemployment declined to 3.4% in June from 3.5% in May. The BoI noted that the employment ratio for ages 25-64 (78.6%) is above that of 2019 (pre-Covid) (77.7%). Monetary policy: Despite low inflation in August due to the sharp decline in petrol prices (which will not impact core inflation), we expect the Bank of Israel to continue to tighten fairly aggressively, by 0.5% in each of the next two rate decision (August and October). Rates are expected to reach 2.75% by early 2023 and stabilize at this level as inflation gradually decelerates back into the target range. The bond market: Bond issuance will decline to 1.7bn ILS in August (from 3.0bn in July), mostly due to low demand from foreigners in the last two weeks of the month.  * Generally, we expect low bond issuance of a total of 10bn in ...