November’s low CPI supports monetary loosening

ISRAEL - In Brief 17 Dec 2023 by Jonathan Katz

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Inflation surprises on the downside Headline inflation declined by 0.3% m/m (expectations were for -0.1%) and slowed to 3.3% y/y from 3.7% last month. Core inflation slowed to 2.9% y/y from 3.5% last month due to a sharp moderation in housing rental (OER) prices to 3.6% y/y from 4.9%. The breakout of hostilities supports weakening inflationary pressure on the demand side in the short run. Looking forward, we could see some demand push inflation from pent-up demand, higher shipping costs, some higher taxation and maybe a weaker shekel (if fiscal credibility is not maintained). FX: Last week, the shekel appreciated by 1.1% against the dollar and weakened by 0.5% against the Euro. Against the basket of currencies, the shekel appreciated by 0.2% last week and is 2.6% stronger since pre-hostilities. The current account surplus remains strong, reaching 5.8bn USD in Q323 following 4.7bn in Q2. FDI into Israel increased to 4.3bn in Q3 USD from 4.0bn. Monetary policy: The possibility of a rate cut on January 1st has increased significantly due to November’s low CPI print and the recent shekel appreciation. If the shekel remains fairly stable, we envision a rate cut in two weeks. The recent dovish Fed stance will be a supporting factor. Economic data: Trade data point to a contraction in both merchandise exports and imports since the war broke out in early October. The trade deficit actually declined modestly in October-November. Job vacancies in November have declined by 19% since September with all sectors seeking less workers except for construction, due to the lack of Palestinian and foreign workers. Credit card purchases (real-time data) reflect a steady recovery in the 1st...