Rate hike of only 0.25% likely in July, due to low CPI

ISRAEL - In Brief 15 Jun 2022 by Jonathan Katz

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Downward inflation surprise in May Inflation in May increased by 0.6% m/m (4.1% y/y), below market consensus of 0.6%-0.8% (we were at the high end of expectations). The big surprise (for us) came from the clothing item which increased by only 2.2% (-6.0% y/y, while in the US prices are up 5.0%!), below the usual seasonality. Items which witnessed price increases include fresh fruit (13.8%, seasonal summer spike, as expected), processed food prices (0.9%, more of this expected in coming months), travel abroad (3.1% m/m and only up 4.6% y/y): higher flight prices are expected in summer months. Housing rental prices (OER) accelerated modestly to 3.4% y/y from 3.2% last month and 1.3% one year ago. Core inflation moved modestly higher from 3.4% in April to 3.6% in May. Housing purchase prices (a separate survey not factored into the CPI) increased by 0.9% m/m and by 15.4% y/y, slowing from 15.9% last month. Further moderation is likely in coming months. Implications on monetary policy: This lower-than-expected CPI print will support a more modest rate hike on July 4th of only 0.25% (previously we had expected 0.5%). With inflation expected to accelerate y/y to around 5% by end-year (due to higher food, rental, and travel prices, wage pressure and a weaker shekel) and remain above target in the coming year, we expect policy rates to reach 2.75% one year from now.