Rates on pause, further tightening will depend on the shekel

ISRAEL - In Brief 10 Jul 2023 by Jonathan Katz

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Rates on pause, further tightening will depend on the shekel The Bank of Israel decided to maintain policy rates stable at 4.75%, stressing that present rates are already restrictive enough. The decision was supported by the lower-than-expected CPI in May and resulting deceleration of inflation (sa) in the past three months annualized (to 3.1%). Nevertheless, inflation in the non-tradeable sector (housing and services) is up 5.4% y/y (and stable) compared to 3.4% in the tradeable sector. Economic growth remains strong with some signs of moderation (soft PC, weak credit growth) and the labor market is tight although job vacancies have declined (especially in the high-tech sector). Inflation expectations (both market and forecasters) are within target, but at the high-end. The monetary statement concluded with “the Monetary Committee decided to leave the interest rate unchanged, but sees a real possibility of having to raise the interest rate in future decisions, if the inflation environment does not continue to moderate as expected.” During the press conference, Governor Yaron made it clear that much will depend on the shekel as crucial in impacting inflation (he even noted that the passthrough may have increased in recent years). The BoI Research Dept. revised their growth estimates to 3.0% in both 2023 and 2024 (from 2.5% and 3.5% respectively). Unemployment is expected to reach 3.7% this year (ave) and 4.1% next. The fiscal deficit is seen reaching 1.3% GDP this year and 1.5% next year. Inflation is expected to reach 3.0% on year from now (Q224 y/y) and 2.4% in 2024. The policy rate forecast was revised to reflect a range of 4.75%-5% in Q224 (up from 4.75% in the las...