Steady growth will support further aggressive tightening

ISRAEL - In Brief 08 Jun 2022 by Jonathan Katz
Business confidence going forward remains strong. The component of expectations for stronger activity in the next three months improved to 10.05 points in May from 8.04 last month (net balance). Both industry and services are reporting expectations for growth in orders, both for exports and domestically. Retail trade is expecting growth, although somewhat slower than in previous months. Inflation expectations one year ahead, according to the corporate sector, pushed higher to 2.47% from 2.25% last month and 1.71% in Dec 21. Steady growth will be an important factor supporting monetary tightening, in addition to a tight labor market, wage pressure in the business sector, accelerating inflation (and recently expectations as well) and higher housing prices. Upward rate hike surprises in Canada and Australia could also support a similar move in Israel (0.5% hike in early July), especially if May’s CPI reaches 0.8% m/m (4.4% y/y, which is our forecast). We note that the last two rate hikes in Israel surprised on the upside, but were unanimous in the MPC: the doves appear to be in hiding at the moment. We expect rates to reach 2.0% by end-year and 2.75% one year from now.

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