Inflation in Israel remains low compared to most countries
Highlights:
Low inflation in November:
*Headline inflation in November inched higher to 2.4% y/y from 2.3%, in line with our forecast but at the low end of consensus.
*Core inflation has remained stable at 2.1% since September.
*Housing rental prices accelerated in November, offset by a price decline in clothing, food, travel abroad and domestic vacation.
*We are currently forecasting inflation of 1.5% in the next 12 month, at the low end of consensus. We maintain our view that the inflation environment will remain relatively low due to shekel appreciation, a fairly restrictive fiscal policy and measures to reduce the cost-of-living.
*On the other hand, housing rental prices will continue to accelerate, and we expect some wage pressure to impact inflation as well.
The CA surplus remains strong:
*The current account surplus reached 5.3bn USD in Q321 following 4.9bn in Q221. We expect a surplus of 4.5% GDP this year.
*Rapid growth of hi-tech service exports has offset the expansion of the trade deficit this year.
*In addition, Net FDI is expected to reach 4% GDP this year.
*Macro fundamentals remain shekel positive.
Housing completions lag demand
*Housing completions reached 46k in the past year through Q321, below the annual household growth estimated at 55k. The bright side is that housing starts are up to 56k.
*Housing prices (including rentals) are expected to move higher in 2022.
Monetary policy: Despite November’s low inflation print and our inflation forecast of 1.5% in the NTM, we still expect a BoI hike in Q322 (we assume following two Fed hikes). The MPC will view inflation as well anchored in the target range, growth robust with low unemployment (our forecast), and will seek to commence the slow process of rate normalization.
FX: Foreign holding of gov bonds increased to 11.4% in Nov, from 11.2% in Oct. and 8.1% one year ago. Makam holdings reached 35% from 32.5%.
Bonds: We continue to see value at the long end of the curve due to the low inflation environment and rapidly declining fiscal deficit (low bond issuance).
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