Rate hike of 0.4% today, above market expectations

ISRAEL - In Brief 23 May 2022 by Jonathan Katz
Rate hike of 0.4% today, above market expectations The Bank of Israel raised policy rates today by 0.4% to 0.75%, above market expectations for a 0.25% hike. We were initially leaning towards a 40% hike, but following the somewhat lower-than-expected GDP print of -1.6% for Q122, we gave this option only a 0.4% probability. The monetary announcement was fairly upbeat, noting that economic activity is continuing at a high level (business optimism high, credit card purchases strong and tax revenues up sharply); the labor market close to full employment, and inflation is more broad-based, including tradeable and non-tradeable items. Supporting factors included the 16.3% y/y in housing prices and a 3% weakening of the shekel against the basket since the last rate decision. For the first time the BoI noted that business sector wages are accelerating at a more rapid pace than the long term trajectory. Regarding the negative GDP print in Q122, this was mentioned in the statement but the main point was that GDP growth y/y is up 9%. Implications: This is was the second straight rate hike that was higher than initial market expectations. BoI Governor Yaron is projecting a rather hawkish stance, despite stating that inflation in Israel is lower than most emerging countries. We maintain our policy rate forecast of 2% one year from now. We think that slowing inflation y/y towards mid-23 will most likely end this tightening cycle.

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