Will inflation surprise on the upside in 2024?

ISRAEL - In Brief 07 Jan 2024 by Jonathan Katz
Rate cut on decelerating inflation Policy rate declined by 0.25% to 4.5% last Monday with the Bank of Israel noting that inflation has moderated significantly in recent months, the shekel has appreciated and other central banks are expected to loosen. The Governor noted that inflation y/y is expected to moderate further into the target range in coming months, and that real rates will actually increase (ex-ante). The previous dominant monetary concern of a too expansionary fiscal policy was placed on the back burner, at least for now. The Bank of Israel macro forecast maintained the 2024 growth forecast at 2.0%, inflation at 2.4% and policy rates at 3.75%-4%. The Bank of Israel increased the fiscal implication of the war to 210 bn ILS (from previously 198bn), which includes the decline in tax revenues. The BoI is forecasting a fiscal deficit of 5.7% GDP this year assuming a fiscal cut of 15bn. Inflation: We have increased our inflation forecast for 2024 to 2.8%. We see four drivers of higher inflation: Higher shipping rates from Asia, accelerating rental prices in 2H24, a mini pent-up demand surge as the war ends, and a slightly weaker shekel on internal political rift. FX: The shekel weakened by 0.8% last week on the back of lower global markets (dollar strength) and concern regarding escalation in the North following the assassination of a chief Hamas militant in Lebanon. The BoI did not sell FX at all in December. Israeli institutions were net purchasers of FX in November of 10.5bn USD, increasing their FX exposure to 21.8% from 20.3% in October. They will likely maintain this FX exposure until the fiscal picture is clarified. Economic data: Credit card purchases (re...

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