Rate stability expected today (Monday) with a loosening bias

ISRAEL - In Brief 26 Nov 2023 by Jonathan Katz

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Geopolitics: Israel’s operation in Gaza has been put on hold for several days in exchange for the return of hostages. The ceasefire is expected to be temporary although the hostage release priority could delay the renewal of the military operation for longer than initially expected. Low level hostilities in the North continue as well as initiatives by the Yemen rebels to try to hit Israeli targets and disrupt sea trade. Monetary policy: We are leaning towards rate stability today. Clearly, the shekel has appreciated sharply (by 5.9% against the basket since the last rate decision), inflation is moderating, and economic growth will face the pinch of a prolonged elevated level of hostilities. Nevertheless, uncertainty regarding Israel’s “risk premium” remains elevated as the 5-year CDS has declined only modestly to 119 bps from a peak of 145bp, still far from the pre-war level of 60bp. We see a 40% change for a rate cut today (could Yaron’s second term approval tip the scales?); but our base case assumes the first rate cut in January. The BoI is likely to publish an unscheduled macro forecast revision downgrading their 2024 GDP forecast to around 1.5% (from 2.8% in Oct), with higher unemployment and a larger fiscal deficit. This could include a rate cut forecast of 0.75%-1.0% by Q423 (compared to 0.50%-0.75% by Q323 in the last forecast). Economic data: The BoI Composite (co-incident) index declined by 1.1% in October due to a 18% decline in credit card purchases, decline in imports as well as export (Oct), revenues and manufacturing (Sept). A special CBS business survey shows a moderate improvement in 19-20th of November compared to the end of October, regarding employm...