A dovish hike combined with hawkish talk

ISRAEL - In Brief 27 Nov 2022 by Jonathan Katz

---

Rates increased by 0.5% to 3.25% On Monday, the BoI hiked rates up by 0.5%, while market expectations were divided between 0.5% and 0.75%. The monetary statement retained the usual justification: Inflation is above target, economic activity is strong, and the labor market tight. On the other hand, other more dovish statements were present in the announcement regarding expectations for slower growth, signs of labor market moderation, expectations for slower inflation, and private sector financing constraints. Following the rate announcement, BoI Deputy Abir sounded more hawkish, in a Reuters interview, said that front-loading is not over, and “it is better to err on the side of making sure we get inflation down” With inflation and core inflation expected to accelerate in November and no real indication of a significant slowdown, we expect a 0.5% hike on January 2nd, and a 0.25% hike on February 20th to a terminal rate of 4.0%. By April 3rd, we expect growth deceleration (in Israel and globally) to become more apparent, unemployment higher, and signs of slowly inflationary pressure supporting rate stability. So far, no real signs of deceleration The Poalim Manufacturing PMI increased by 2.3 points to 53.6 in October. Although the Poalim consumer confidence index remains soft. In September, revenues of the total economy (VAT derived) increased by 1.3% m/m, and manufacturing by 0.7%. Unemployment did tick higher to 4.1% in Oct. from 3.5% in Aug. Inflation forecast: Electricity prices will increase by 8.2% in January, most likely pushing water prices up 4%. We assume the petrol excise tax reduction will be cancelled on December 1st, pushing up petrol prices by about 7%. All...