The Governor sends a stern warning

ISRAEL - In Brief 03 Apr 2023 by Jonathan Katz

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Rates up with a stern warning Today’s rate hike of 0.25% to 4.5% was widely expected due to broad and sticky inflation, growth in line with the long-term trend, and a tight labor market. The Bank of Israel Research Dept. macro forecast attracted much more attention. For the first time since Covid, the BoI presented both an optimistic scenario regarding the judicial legislation (wide consensus compromise, no damage to credit rating) and the potential downside risk of legislation (unilateral) which damages Israel’s credit rating. The base case (optimistic) forecast sees rates at 4.75% one year from now, growth at 2.5% this year (previously 2.8%) and 3.5% next year, inflation at 3.9% in 2023 and 2.3% in 2024, unemployment slightly higher by 0.5% and the fiscal deficit steady and low at 0.9% GDP in both years. The Governor stressed the downside risk giving a wide spectrum of damage to GDP growth from 0.8% to 2.8% per year over the next three years, a weaker shekel, higher inflation and higher rates (apparently by nearly 1.9% in the first year, with no clear forecast for year 2 and 3). We think the Governor wanted to express the tremendous potential damage to the economy from these judicial measures (as presently being proposed in Parliament if no compromise is reached) on investments, private consumption, and exports, using the recessionary years of 2001-2002 (both the dot-com bubble and the prolonged escalation of terrorism in Israel) as a possible benchmark for the magnitude of damage to the economy. If we stick to the broad compromise optimistic scenario, the Governor sees the end of the tightening cycle approaching and most damage to the economy so far as fairly minima...