Rates on hold on the back of elevated geopolitical risks

ISRAEL - In Brief 27 May 2024 by Jonathan Katz

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As expected, rates remain steady at 4.5% In the past few rate decisions, the Bank of Israel has been clear regarding the overwhelming consideration of elevated geopolitical risks. Therefore, this decision was totally predictable with the war grinding on steadily in Gaza and in the North. The opening statement makes this clear “Economic activity and the labor market continue to recover gradually. Alongside this, continued geopolitical uncertainty is reflected in the economy’s high risk premium” as well as the summary statement “In view of the war, the Monetary Committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity”. In addition to this overriding consideration, the MPC sounds rather hawkish regarding an increase in the inflation environment “The inflation dynamic has increased and inflation in the past three months, seasonally adjusted in annual terms, has been higher than year-over-year inflation”, despite that this is not really accurate if we strip out the sharp increase in cigarette tax in March. Core inflation excluding “government measures” actually moderated to 2.1% y/y in April (from 2.2% in March), despite the spike in travel costs. Nevertheless, the forward-looking risks are elevated (as we have been emphasizing for several months) “The Committee’s assessment is that there are several risks of a potential acceleration in inflation: geopolitical developments and their effects on economic activity, a depreciation of the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices”. Growth has recove...