Further tightening expected ahead

ISRAEL - In Brief 28 Aug 2022 by Jonathan Katz

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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 DM 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 somewhat of a hawk, and very much influenced by Fed chair Governor Powell. Following last week’s rate hike, we envision a 0.5% hike on October 3rd (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 1st quarter of 2023. At the next rate decision in early October, we expect an upward revision in the BoI macro forecast, both of GDP growth in 2022 as well as in the policy rate forecast (from 2.75% in Q223 to 3%-3.25% in Q323). Implication for the bond market: A fairly hawkish BoI gives assurance that inflation in coming years will come down to 2% if not lower. We could see an inverted curve by-end year. This should be positive for the long end when markets sense that the tightening cycle is coming to an end. Economic data was sparse last week, but generally positive: Hi-tech exports expanded by 4.7% saar in Q222, and hi-tech exits (sales of start-ups) remain fairly strong. Daily BoI data regarding credit card purchases point to approximately a 1% m/m increase in August, following a similar increase in July (sa). The BoI composi...