Next rate decision will hinge mostly on the direction of the shekel

ISRAEL - In Brief 18 Mar 2024 by Jonathan Katz

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Inflation continued to moderate in February Inflation slowed to 2.5% y/y from 2.6%, and core to 2.2% from 2.4%. The main item moderating inflation was housing rental prices which decelerated to 2.0% y/y from 3.0% last month. Other items tended to surprise on the upside, both goods and services. Inflation forecast: We expect inflation to reach 3.2% in the NTM, due to an expansionary fiscal policy, higher rental prices and the impact from higher shipping costs. Monetary policy: a rate cut is far from assured in the next rate decision on April 8th. There are inflation risks going forward from housing rental prices, an expansive fiscal policy and a rebound in demand. The volatility of the shekel will be crucial until the next rate decision (as it has been in previous decisions). External fundamentals remain shekel positive: The CA surplus improved to 10.5bn USD in Q423 from 4.7bn in Q323, in part due to the temporary contraction of imports due to the war. The trade deficit continues to shrink in January-February 24 as industrial exports rebounded in February (9.5%) as did most import items (but less so). Despite the strong excess exports over imports in 2023, according to the BoI importers purchased 49bn USD while exporter sold 42bn USD. Exporters sell only part of their FX revenues to shekels (to finance wages mostly). FX: The shekel weakened by 1.7% against the basket of currencies, due to escalation fears in the North, as well as declining equity markets abroad. Israeli institutions were net seller of 0.8bn USD in January. Job vacancies declined slightly in February but remain 6% above pre-war. Both industry and high-tech services are reporting strong demand for workers...