Shekel depreciation increases the likelihood of further tightening

ISRAEL - In Brief 13 Aug 2023 by Jonathan Katz

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Shekel weakening continues Last week, the shekel declined by 0.9% against the basket and 4% YTD. The BoI views the shekel as critical for inflation, and sees the FX passthrough at 10%-20% having increased in recent months. In June, Israeli institutions were net purchasers of 0.8bn USD and 5.2bn in the 1st half of 2023. Israeli households were additional purchasers of approximately 1bn USD. If this weakening trend continues by end-month, the likelihood of a rate hike will increase in September, depending on July’s CPI of course. Currently, we see a hike in October as more likely. Politics: Political developments last week were sparse, as the Knesset is currently in recess. Demonstrations continued as usual Saturday evening. Netanyahu continues to declare that the judicial overhaul will continue in the next Parliamentary session, especially changing the committee to appoint judges in favor of a coalition majority. Approaching September 12th, we expect elevated market volatility as the Supreme Court reviews the judicial legitimacy of the cancelling of the reasonableness clause. Economic news was generally positive The Business Tendency Survey in July points to steady growth with some expected growth deceleration next month. The high-tech service sector appears more optimistic regarding both exports and employment. Trade data reflect strong export growth (defense mostly) and weak imports. Fiscal numbers in July were “decent” with tax revenues down more modestly relative to 1H23, especially concentrated in the housing sector. The fiscal deficit in the NTM increased modestly to 1.0% from 0.9%. Inflation: We have increased our inflation forecast to 3.1% (from 3.0%) in the nex...