Rate hold decision with a hawkish message

ISRAEL - In Brief 08 Jul 2024 by Jonathan Katz

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Rate hold decision with a hawkish message To our surprise, instead of a hint of possible loosening when geopolitical risks subside, the underlying message was one of concern regarding inflationary pressure going forward and concern regarding more prolonged hostilities at a more intense level preventing any significant loosening. The rate forecast of the BoI Research Dept was revised to 4.25% in the 2st quarter of 2025, up from 3.75% (in Q125) in the April forecast. We note that the BoI forecast is usually adjusted following a dialogue between the Research Dept and the MPC. The announcement itself was rather hawkish with inflationary risks ahead rather pronounced: “The Committee’s assessment is that there are several risks of a potential acceleration in inflation: geopolitical developments and their effects on economic activity, a depreciation of the shekel, continued supply constraints on activity in the housing market and the air travel industry, fiscal developments, and global oil prices.” Clearly, the main rationale for maintaining rates stable is the elevated geopolitical risks, but the MPC also fears supply constraints spilling over onto inflation as well a tight labor market and expansionary fiscal policy. The macro forecast sees inflation reaching 3.2% from Q224 to Q225 (previously 2.8%), higher than market expectations, which are at around 2.9%. GDP growth is expected to reach 1.5% this year (revised down from 2.0%) and 4.2% in 2025 (revised from 5.0%). The Governor noted that growth has decelerated in the second quarter, including private consumption. Generally, our forecast, both inflation and rates, is in line with that of the Bank of Israel. As long as host...