Will the BoI reduce rates on Monday? Probably not

ISRAEL - In Brief 27 Dec 2023 by Jonathan Katz

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Will the BoI reduce rates on Monday? Probably not The next rate decision on January 1st could really go either way (rate cut or hold), although we are leaning towards a rate hold decision. The factors supporting easing include the sharp decline in inflation in November (headline: 3.3% y/y, core: 2.9%) with seasonality adjusted annual inflation in the past 3 months (2.3%) and 6 months (2.7%) within target. Clearly, weak consumer demand is slowing inflationary pressure. Broad unemployment is at 10% (including those on un-paid leave and those who lost their job and stopped looking for work). GDP growth is expected to slow considerably (the BoI is forecasting 2% in 2024, most forecasters expect closer to 1.5%). Globally, markets expect a Fed cut in March. The shekel has appreciated by about 2.5% since that last rate decision (against the basket). Why keep rates on hold? The war goes on and uncertainty regarding possible geopolitical developments remains elevated. Shekel volatility could return rather quickly. More importantly, Governor Yaron is rather concerned regarding fiscal policy going forward with the present government struggling to consolidate and trim civilian spending, coalition perks, and raise some taxes (recently they cancelled the return of taxation on soft drinks). The possibility of a deterioration in fiscal credibility (supporting a rating downgrade) could weaken the shekel and is viewed by the BoI as inflationary (excessive spending). We note the present tight monetary policy is not the reason for the economic downturn (the war is) and the BoI has taken measures to alleviate (or postpone) the debt burden for those mobilized, and for residents near the bor...