No rate cuts in sight as inflation risks remain elevated

ISRAEL - In Brief 25 Aug 2024 by Jonathan Katz

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Geopolitics: There is a renewed optimism in the negotiations regarding a ceasefire/hostage deal, with Hamas sending representatives to Cairo. Following Israel’s pre-emptive strike on some 100 missile launchers in Lebanon poised to fire missiles towards the center of Israel, there is general satisfaction as casualties were avoided and possibly Hezbollah with avoid a retaliation. The combination of renewed negotiations and the feeling that Hezbollah has played its hand supported higher equity prices in the market. Rate-hold decision expected this week with hawkish tone Contrary to the global trend, inflation in Israel has accelerated, both headline (from 2.9% y/y in June to 3.2% in July) and core (from 2.5% to 2.8%). June’s CPI surprised slightly to the upside. The BoI will continue to stress several inflationary risks, including fiscal policy, a tight labor market, housing price pressures, and supply disruptions. The shekel remains vulnerable to elevated geopolitical risks. • We note especially the letter sent from the Governor to the government expressing strong dissatisfaction regarding the lack of progress towards a credible fiscal framework in 2025. The labor market continues to tighten Unemployment declined to 2.8% in July from 3.1% in June. Broad unemployment (including employed evacuees unable to work) declined as well. Our demand/supply ratio in the labor market continues to push higher. This is mostly due to labor supply issues, including the lack of Palestinian workers. A tight labor has support wage pressure and an acceleration of non-housing service inflation to 3.9% y/y in July from 3.2% in June. Recent economic indicators have been mostly weak: The BoI Com...