Probability of a 0.5% rate hike next week has increased

ISRAEL - In Brief 12 Feb 2023 by Jonathan Katz

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Uncertainty regarding the judicial reforms continue Last week, the shekel weakened by 3.2% against the dollar and by 1.2% against the Euro. The shekel continued to weaken in the FX option trading yesterday. Several international investment banks and economists have expressed concern regarding the proposed judicial reforms, warning of a possible downgrading of Israel’s sovereign rating (negative watch) unless a reasonable compromise is reached. Although Netanyahu has mentioned the possibility of some dialogue with the opposition and possible revisions, the government continues to push forward in Parliament with the original proposal which will be voted on this week (1st vote out of three voted necessary). We expect the fiscal deficit to reach 3.7% GDP this year January did witness a seasonal fiscal surplus of 14.2bn compared to surplus of 18.6bn last year. Tax revenues were down by 12% y/y in real terms, especially direct taxes. Government spending of ministries was up 6.8% y/y, a rather rapid pace. The lack of an approved budget is not actually restrictive. We see the combination of weaker revenues (from hi-tech and real-estate sectors especially) and accelerated spending resulting in a fiscal deficit of 3.7% this year. The Business Tendency Survey pointed to strong and steady growth but weakening expectations regarding future growth. Export orders have softened but employment expectations improved modestly. Consumer confidence declined 4 points to a low historical level of -21 points. Nevertheless, the number of Israelis that traveled abroad is up 16% in January 23 compared to January 2020 (pre-Covid). Inflation forecast: We have increased our inflation forecast to 3....