Further tightening expected ahead
The MPC continues to reveal its hawkish bias
* Policy rates moved 0.75% higher, to 2.0%, at the high end of consensus, which was in the 0.5%-0.75% range and closer to 0.5%.
* Rates have pretty much surprised on the upside since the tightening cycle commenced.
* Present rates (2.0%) are relatively high compared to other DMs with much higher inflation.
* The monetary statement mentioned that inflation is accelerating and broad based, economic activity is strong, the labor market tight with some wage inflation. Lower inflation expectations were noted as well.
* We view Governor Yaron as something of a hawk, and very much influenced by Federal Reserve Chair Powell.
* Following last week’s rate hike, we envision a 0.5% hike on October 3 (but much will depend on incoming data, inflation especially) and 2-3 more hikes of 0.25% to a level of 3%-3.25% by the end of the first quarter of 2023.
* At the next rate decision in early October, we expect an upward revision in the BoI macro forecast, both for GDP growth in 2022 as well as in the policy rate forecast (from 2.75% in Q2 2023 to 3%-3.25% in Q3 2023).
Implications for the bond market: A fairly hawkish BoI gives assurance that inflation in the coming years will decline to 2%, if not lower. We could see an inverted curve by year-end. This should be positive for the long end when markets sense that the tightening cycle is coming to an end.
Another aggressive move by the BoI
The Bank of Israel continues to tighten more aggressively than market expectations, as it has done since the beginning of this tightening cycle. It will be interesting to note next week whether this rate decision was unanimous as well. Israel has tightened quickly compared to most developed markets suffering from much higher inflation. Following this hawkish decision, it is fair to assume that rates will reach 3%-3.25% by the second quarter of 2023. We note that according to our inflation forecast, both headline and core inflation will remain elevated (above 4% y/y) until early 2023.
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