Rate cut still difficult to price in without a cease-fire

ISRAEL - In Brief 14 Jun 2024 by Jonathan Katz

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Sharp downward inflation surprise in May It is rare we see such a below-expectations inflation print. Inflation came in at 0.2% m/m (consensus in Israel was 0.5%-0.7%, we were at the high end), holding steady at 2.8% y/y similar to last month. The main “culprit” for this surprise was flights abroad which declined by 14.7% m/m after increasing 18.7% last month. More inexplicable is the y/y decline of 7.5% (or close to 9% in dollar terms). The effective weight of this item is 2.2%, therefore the contribution to inflation was close to 0.4% (we had expected a flat print). The methodology used to measure this item was revised in September 23, making this item more volatile and difficult to predict. Israelis are complaining that since the war broke out and the number of international carriers has declined pronouncedly, prices of flights have spiked (not in line with the CPI print), with El Al controlling over 70% of the market. Again, we have no satisfactory explanation and it is likely we will see upward corrections in coming months. With cost of travel abroad declining sharply (according to the CBS), core inflation moderated to 2.2% y/y from 2.4%. Housing rentals (OER) moderated to 1.9% y/y from 2.0%, services ex-housing moderated to 3.2% y/y from 3.5%, and core goods declined to 0.1% y/y from 0.2%. Implications for monetary policy: If a war was not going on with elevated geopolitical risks, one could make a case for monetary loosening. Regardless, the BoI will most likely prefer to see another CPI print before considering a cut. Governor Yaron and the MPC have made it clear that the behavior of the shekel (volatility, etc.) as a result of elevated risks is the overriding ...