Rates reduced as inflation moderates

ISRAEL - In Brief 01 Jan 2024 by Jonathan Katz
Rates reduced as inflation moderates The BOI cut rates by 0.25% to 4.5% due to the inflation deceleration (which is expected to continue into Q124) as well as lower inflation expectations. This trend (supported by shekel appreciation) effectively raises real rates and allows for lower rates, despite concerns regarding fiscal policy, as stressed by the Governor in his press conference: “The budget policy has a strong impact on economic activity, and likely on financial markets, and thus on the development of prices as well. Therefore, it will also have considerable weight in determining our monetary policy path.” The BOI macro forecast expects the fiscal deficit to reach 5.7% GDP in 2024 (debt/GDP: 66%) by fiscal adjustments of 15bn ILS with a similar cut in 2025. Growth will reach 2% this year (we think this is a bit optimistic) and 5% in 2025. The inflation forecast was maintained at 2.4% in 2024 and the rate forecast by end- year at 3.75-4 percent. In our view the fiscal credibility risk is a real one, and this could renew shekel weakness, supporting higher inflation and limiting the potential for rate cuts.

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