Rate hike of 0.5% likely today

ISRAEL - In Brief 20 Nov 2022 by Jonathan Katz

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Today’s rate decision will not be an easy one Expectations are divided between a 0.5% and a 0.75% hike. Several factors support a 0.75% hike, including October’s upward inflation surprise, accelerating core inflation y/y, presently decent growth, a tight labor market and wage pressures. Other factors, such as the present real level of rates, decline in inflation expectations, signs of higher unemployment, and business sector pessimism going forward support a more cautious 0.5% hike. We are leaning towards a 0.5% hike (60% probability). We envision two more 0.25% hikes in Q123 to a terminal rate level of 3.75%. CPI surprised slightly on the upside, with core inflation accelerating to 5.0% y/y from 4.7% last month. Housing rental prices (OER) accelerated to 5.6% y/y from 5.3%. We expect inflation to reach 2.9% in the next 12 months and 2.5% in 2023, as housing rental prices decelerate, and the new government pursues a policy of reducing the cost of living. This will include cancelling the tax of soft drinks and disposable utensils, and freezing energy prices. We assume this policy will push the fiscal deficit higher to 2.5% GDP in 2023 (in addition to increased social spending, a softer tax revenues). Markets await to see who will be the next Minister of Finance. GDP growth moderated to 2.1% in Q322 following rapid growth in Q2. Private consumption was weak, while investment growth, public consumption, and exports of hi-tech services supported GDP growth. We expect growth of 2.8% in 2023. In October, job vacancies declined to 147.9k from 150.9k in September (sa). The decline was broad-based in most sectors, especially in services. This is the first time we have witnessed...