Rates on hold on inflation risks and fiscal concerns

ISRAEL - In Brief 30 Aug 2024 by Jonathan Katz

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Geopolitics: Although the intensity of the war in Gaza appears to be winding down, a cease-fire and hostage return remain elusive. Netanyahu insists on maintaining a presence on the Philadelphia Corridor in order to prevent renewed transfer of weapons from Egypt into Gaza. Negotiations are continuing, which is encouraging. A temporary cease-fire has been implemented in order to vaccinate against Polio. The intensity of missiles striking Israel’s North has also declined, but the Minister of Defense (with the support from Netanyahu) is seeking to broaden the war aims to include dealing with this Hezbollah threat in order to permit the evacuees to return to their homes. Private consumption surprised on the upside in July Real credit card purchases in the domestic economy increased by 2.1% m/m and are 8% above pre-war levels. This is due to government transfers, wage growth and less travel abroad. • This strong consumer demand has supported tax revenues but inflationary pressures as well. Hi-tech service export growth has slowed The level of hi-tech service exports in Q224 are similar to Q124. According to BoI estimates, the hi-tech sector has raised abroad at a pace of 2.0bn USD in Q323, following 3.1bn in Q2, but somewhat below 2023. Slowing growth in this important economic driver is due mostly to less demand from abroad, and will be a factor reducing Israel’s CA surplus. Rates remained on hold with a hawkish message. The MPC is concerned about fiscal credibility and accelerating inflation and upside risks. Both the Governor and the Deputy Governor warned that the postponement of a credible 2025 fiscal framework will impact monetary policy. The bond market: The MoF will...