We expect a rate hike of 0.25% today, but a 0.5% hike cannot be ruled out

ISRAEL - In Brief 21 May 2023 by Jonathan Katz

---

We expect a rate hike of 0.25% today, but cannot rule out 0.5% Nevertheless, the MPC will most likely also discuss a sharper hike of 0.5% (most likely a minority view). Most macro factors support further tightening: May’s upward inflation surprise, acceleration in core inflation, tight labor market, and decent growth indicators (despite business sector pessimism going forward). With rates already restrictive, inflationary expectations well anchored within the target range and global growth decelerating, we see a sharper rate hike of 0.5% as unlikely. The MPC will prefer to be cautious, raising rates by 0.25% today with the possibility of another 0.25% rate hike in July if the underlying conditions support this (which we doubt). FX: the shekel has appreciated (against the basket of currencies) by 0.8% last week and by 1.9% in the last 10 days. The realization that the unilateral judicial overhaul is apparently not on the table has been shekel positive. In March, foreigners increased their government bond holdings to 13.3% of the total stock, up from 11.5% in December 22, as local institutions reduced their exposure. On the other hand, foreigner’s Makam holdings have decline sharply. The bond market: The 10-year bond differential vis-à-vis the US T-bills has gradually declined in the past few weeks. Assuming the judicial legislation issue slowly disappears and the shekel continues to appreciate, we should also see a further positive momentum in the bond market. Politics: The coalition will most likely reach an agreement among the various parties regarding approving the 2023-2024 fiscal budget by May 29th. Although there will be a sharp increase in funds to the ultra-orth...