Shekel appreciation continues and is expected to moderate monetary tightening

ISRAEL - In Brief 14 Aug 2022 by Jonathan Katz
Consumers are pessimistic but the business sector sees growth ahead: The CBS consumer index declined in July to the lowest level since October 2020 (Covid lockdown), especially the forward-looking components. The Business Sector Tendency Survey points to steady growth and expectations of further growth in coming months. Two special surveys point to stability in the hi-tech sector (despite the equity market decline this year) and expectations for growth ahead in exports and employment. Israel enjoyed a fiscal surplus in July of 2.6bn ILS with the cumulative fiscal surplus reaching 0.6% of GDP in the last 12 months. Tax revenue growth has moderated but remains positive, while spending remains below fiscal allocation. On the other hand, manufacturing exports declined by 9% m/m in July following a strong second quarter, but monthly data is often volatile. New home sales declined by 8% m/m in June, following a similar trend since end-21. The level of new home sales is down 29% compared to 2021 (record year), but similar to pre-Covid 2019. FX: The shekel appreciated by 2.5% against the basket of currencies last week, and has appreciated by 9% since early July! The depreciation of 1H22 has been erased, with a YTD shekel appreciation of 1.6%. In June, Israeli savings institutions were net purchasers of 1.9bn USD. Foreigners increased their exposure to government bonds. Inflation forecast: As a result of the sharp shekel appreciation, we continue to revise downward our inflation forecast to 2.2% in the NTM from 2.4% last week. The rough estimate for the FX passthrough is 0.1 - 0.15. The impact is felt directly in items such as travel abroad and energy, and indirectly in importe...

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