Rates on hold on inflation acceleration and elevated risks

ISRAEL - In Brief 28 Aug 2024 by Jonathan Katz

---

Rates were on hold today as expected, With the BoI noting that inflation is on an upward trajectory, especially service price inflation. There are “several risks for a possible acceleration in inflation: geopolitical developments and their impact on economic activity, shekel depreciation, prolonged supply limitations on activity, and fiscal developments” The BoI still expects a fiscal deficit of 6.6% GDP this year, if there is no unexpected additional defense allocation. Regarding 2025 “The uncertainty surrounding the State budget for 2025, and the implementation of adjustments required to reduce the deficit on an ongoing basis, contributes to an increase in the risk premium and is liable to weigh on the return of inflation to its target.” Current indicators of the state of economic activity point to continued moderate growth of activity in July–August, but due to supply disruptions, the labor market is tight and nominal wages are up 7% annually, although productivity is also up. The forward guidance remained the same: “In view of the continuing war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity. The interest rate path will be determined in accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy.” Monetary outlook: With inflation y/y expected to continue to accelerate (due to higher rental prices, wage pressure and higher taxes) to a level of 3.8% y/y in Q125 (our forecast as well as average forecasters), it is difficult to envision a rate cut until mid-25, certainly as long ...