Rates on hold for now, but possible tightening in the coming year

ISRAEL - In Brief 10 Oct 2024 by Jonathan Katz

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Rates on hold despite an increase in the inflation environment There were no real surprises in the interest rate decision. The Bank of Israel noted that there was an acceleration in inflation broadly, including tradable components (mainly goods) and non-tradable components (services), mainly due to supply constraints. The inflation threats continue to be numerous: "geopolitical developments and their impact on economic activity, depreciation of the shekel, ongoing supply constraints, fiscal developments, and the increase in oil prices worldwide." There was some increase in activity in the third quarter, the labor market remains tight, and nominal wages continue to increase, albeit at a slightly more moderate pace. The macro forecast sees growth of 0.5% this year and 3.8% in 2025, inflation of 3.8% this year and 2.8% in 2025 (3.2% one year ahead), and a budget deficit of 7.2% and 4.9%, respectively. The interest rate is expected to remain unchanged until at least Q325. " our assessment is that the balance of risks relating to the growth forecast tends downward, while in relation to the inflation, deficit, and interest rate forecasts, the balance of risks tends upward." The Governor did not address the question 'Did the Committee also consider the possibility of raising the interest rate?' and believes that monetary policy is currently sufficiently restrictive. The Bank of Israel is aware that inflation y/y is expected to accelerate markedly in the first quarter, so that the real interest rate will be zero, but said that even post-Covid, inflation was higher than policy rates for a while. The expectation is that inflation will moderate thereafter; but if inflation remain...