Rates to remain on hold for quite some time as inflation accelerates; a rate hike cannot be ruled out if the shekel weakens

ISRAEL - In Brief 15 Sep 2024 by Jonathan Katz

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Geopolitics: Cease-fire negotiations with Hamas appear to have stalled. Israel continues to target specific areas in Gaza (but with a lower level of intensity) and the level of hostilities (number of missile barrages) in the North appear to have escalated. A missile from Yemen was intercepted 35 km from Tel Aviv. The government is adding “returning the residents to their homes in the North” as an additional goal of the war. This increases the chances of a ground operation in Southern Lebanon. Inflation in August reached 0.9% m/m Inflation is up 3.6% y/y (from 3.2%). Core inflation accelerated to 3.1%. from 2.8%. Fresh produce (6.2% m/m) and airfares (22%) spiked sharply. We expect inflation to reach 3.1% in the NTM (3.3% in 2025), impacted by a tight labor market, wage growth, an expansionary fiscal policy and supply issues, especially in the housing market. The joker in the pack remains the shekel, as fundamentals remain shekel supportive, but geopolitics is another story. Trade data in August is encouraging Manufacturing exports increased by 13% m/m, especially chemicals (energy) and defense exports (metal products). Imports of consumer goods are also expanding, a sign of strong private consumption demand. The trade deficit is trending lower, a positive development for the shekel. New home sales are up 62% y/y in July, in part due to demand from evacuees, pent-up demand, and attractive “deals” from contractors. Consumer confidence declined slightly in August, and basically is back to the low Covid levels. Clearly geopolitics is the reason, even as fiscal support has supported fairly strong private consumption, especially in Q324. The fiscal deficit pushes higher, but...