Sharp shekel appreciation likely to prevent further rate hike

ISRAEL - In Brief 11 Jun 2023 by Jonathan Katz

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Fiscal data continues to support credibility in 2023, 2024 could be more problematic The fiscal deficit is gradually increasing as tax revenues decline, but the pace appears modest. The fiscal deficit reached 0.6% GDP in the last 12 months, up from 0.3% last month. Tax revenues are down 7.8% y/y in real terms since the beginning of the year while expenditures are up 8.7% (in nominal terms, 3.5% in real terms). Nevertheless, even if tax revenues decline further in 2H23, the fiscal deficit will likely reach 1.8%-2.0% GDP this year, above the 1.2% forecast. 2024 will be more challenging unless the economy rebounds. Economic activity remains strong and stable in May Business Sector Sentiment remained positive in May with the current conditions actually improving (as well as expectations for the coming month). In the medium term, the private sector is more pessimistic. Expectations for employment also improved as well as expectations for high-tech export growth next month. This positive print will support the MPC’s statement regarding “Economic activity in Israel remains strong, but some economic indicators point to a moderation in activity”. Nevertheless, the sharp appreciation of the shekel will carry more weight in the next rate decision. Consumer confidence (CBS) remained low in May, similar to 2022 level. Monetary policy: We expect rate stability at 4.75% through 2023, and then a gradual loosening trend starting in early 2024, with rate reaching 4.0% by year-end. FX: The shekel appreciated sharply last week, by 3.55% against the basket of currencies (with further appreciation Friday afternoon), as the political overhaul appears to be no longer an issue. Inflation: The ...