Despite strong activity and employment growth, the BoI sees low inflation ahead

ISRAEL - In Brief 03 Jan 2022 by Jonathan Katz

The policy rate statement today had a slightly more hawkish tone as data released since the previous rate decision has been rather robust, with strong employment growth in November (92k new employees) and accelerating activity. and private consumption. On the other hand, the possible downside risk from Omicron was stressed (although he did not appear to concerned, saying in the press conference that he expects short Covid wave). The Governor continues to stress that inflation in Israel is much lower than in most OECD countries and this allows the BoI to be patient. Growth has been robust in Q421, with strong business surveys and private consumption, at least until December. The Governor stressed that the FX intervention of 2021 (strong intervention - 30bn USD scheme) will not be renewed, but some intervention will continue in order to slow appreciation, but not prevent it. The more the economy recovers and employment is strong, the less he views this policy as justified. BoI Macro Forecast: The GDP forecast was revised downward for 2021 (from 7% to 6.5%), but this is due to downward GDP revisions for 1H21. The growth forecast for 2022 remained at 5.5% (above market forecasts) with 5% for 2023 (1st time 2023 appears in the macro forecast-also reflecting strong growth). The 2022 inflation forecast remained at 1.6% (similar to the October forecast and 2% for 2023. Low inflation in 2022 is due to the sharp shekel appreciation at the end of 2021 spilling over. The 0.1%-0.25% range for policy rates in 2022 was maintained. No rate forecast was presented for 2023.

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