How hawkish will the BoI sound today?

ISRAEL - In Brief 10 Apr 2022 by Jonathan Katz

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We expect a rate hike today of 0.15% Due to robust growth and strong labor market, we cannot rule out a rate hike of 0.4% to a level of 0.5% (35% probability). All conditions have been met to commence a tightening cycle: recovery from the pandemic, rapid economic growth, strong labor market, inflation above target (core at 3.0% y/y), elevated inflation expectations and a frothy housing market. A rate hike is already priced in the markets, what will be more revealing will be both the BoI inflation/interest rate forecast, as well as the Governor’s press conference. We expect the policy rate forecast to reflect a range 1.0%-1.25% one year from now; above this range would sound hawkish.The fiscal deficit declined to 1.4% GDP in the last 12 months through March, from 2.2% in February. Tax revenues (in real terms) are up 30% y/y in Q122, while non-Covid spending is up only 0.2%. This is positive for the bond market as issuance is likely to decline. Moody’s maintained Israel’s A1 rating but improved it to a positive watch (from neutral). The 10 year yield differential vis-à-vis the US widened to 40 basis points.The labor market has tightened significantly Narrow unemployment declined to 3.2% in the 1st half of March. The employment ratio is back to pre-Covid levels.Business sector wages are up 5.6% annually. This is a fairly rapid pace; we note that the public sector wage freeze has moderated the total wage growth to 4.3% annual.The business sector expects accelerating growth The CBS tendency survey points to expectations of stronger orders and employment in most sectors.Consumer confidence in March declined to -19 points from -18 last month and -7 one year ago. This is likel...