Rate hold expected on Monday on elevated risks

ISRAEL - In Brief 24 May 2024 by Jonathan Katz
Geopolitics: Renewed fighting in Gaza continues, including Israel’s push into Rafah. The missile barrage from Lebanon continues as well. There is a renewed initiative to reach cease-fire in Gaza and the US is pushing hard to broker a US-Saudi-Israel agreement, but so far Netanyahu has been opposed to agreeing to making a statement regarding the possibility of a future Palestinian state, under pressure from his right-wing coalition partners. Monetary policy: Rate hold expected on Monday on elevated risks. In recent decision, the MPC has stressed the importance of elevated geopolitical risks in their rate decision, as a factor potentially putting downward pressure on the shekel. Inflation surprised on the upside in April and inflation expectations have drifted higher, towards the top end of target (3% for the major forecasters). The labor market is tightening coupled with wage pressure. On the other hand, at present core inflation (exc. Gov) remains low at 2.1% y/y. Growth has recovered only partially from the war. Job vacancies push higher in April, up 2.6% m/m and 18% above pre-war. The demand for labor (vacancies)-to-supply (no. of unemployed) ratio has reached 0.98 compared to 0.76 in Q323, and is historically high. The PMI in April remained nearly stable at 50.9, with export orders up and domestic orders down. Our inflation forecast (3.3% NTM) remains at the high end of consensus. The “travel abroad” item still has much catching up to do. This is in addition to macro drivers such as a fiscal expansionary policy, tight labor market, housing dynamics and supply disruptions. The bond market: Since non-tradeable bonds were cancelled in October 2022, pension funds have i...

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