Rate cut expected next week, assuming limited shekel volatility this week

ISRAEL - In Brief 31 Mar 2024 by Jonathan Katz

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Private consumption remains elevated Although domestic real credit card purchases declined by 2% in February, the level of purchases is 3.8% higher than the pre-war level in September (SA). Real-time data from the BoI point to 3% m/m growth in March. This high level of consumption is due in part to the low number of Israelis traveling abroad (therefore spending more domestically). In addition, fiscal supports to various sectors (evacuees, mobilized soldiers, businesses) have been fairly generous. This is reflected in the broad monetary aggregate, up 6.3% in the past five months. Monetary policy: Currently, our base call is for a rate cut next week of 0.25% to 4.25%. Inflation has moderated (core inflation at 2.2%), and although short term inflation expectations have pushed slightly higher, longer-term expectations are well anchored. The shekel has seen some fluctuation but is still generally strong. Global central banks are still signaling rate cuts in 2H24. Our rate cut call assumes the shekel remains close to 3.70/USD and does note fluctuate significantly in the coming week. Inflation forecast: We maintain our higher-than-consensus forecast for inflation expected to reach 3.2% in the NTM, due to an expansionary fiscal policy, higher rental prices and some impact from higher shipping costs, especially on new vehicles from Asia. Our forecast assumes a stable shekel. Petro prices increased by 2.8% today, contributing nearly 0.1% to inflation, and taxi fares went up by 2.9%. The minimum wage (by law) increased by 5.5%, which will impact pre-school education (kindergarten costs) and have an indirect impact on cost-push inflation. FX: Last week, the shekel weakened by 1.6%...