The chances of a rate cut on Monday have diminished

ISRAEL - In Brief 07 Apr 2024 by Jonathan Katz
Monetary policy: We have shifted our rate forecast today to hold, due to last week’s weaker shekel and elevated risk for escalation. In addition, we think the BoI is increasingly concerned about the expansionary fiscal policy. The BoI revised macro forecast is expected to reflect a higher fiscal deficit, higher inflation, and less rate reductions than the January forecast. Our Inflation forecast: We revise our inflation forecast up to 3.4% NTM. The shekel weakened last week by 1.9% (against the basket) due to elevated geopolitical escalation following Israel’s strike on the Iranian Embassy in Damascus. Lower global equity prices were a secondary factor supporting a weaker shekel as well (forcing institutions to purchase FX in order to maintain their FX exposure). Due to the spike in global oil prices (and a weaker shekel), petrol prices are expected to increase by 5% in May and contribute 0.16% to the CPI. Economic indicators point to steady recovery The BoI composite index increased by 0.5% in February and previous months were revised upwards. Revenues from the various sectors increased by 4.6% m/m in January. Manufacturing increased by 3.8% m/m in January. High-tech service exports increased by 8.5% in January, and are up 6.2% y/y. The average wage accelerated to 9.2% y/y in February from 5.8% in January on a generally tight labor market. Geopolitics: Fear of escalation has increased, possibly in the North or directly from Iran in retaliation for the assassination of Mohammad Reza Zahedi and other Al Quds members in Damascus. Two officers were removed from service following the tragic killing of seven workers from World Central Kitchen. Large demonstrations continued...

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