Low inflation and elevated global risks support rate stability in January
Highlights:
* Housing starts have slowed this year to an annual pace of 46k units.
- On the other hand residential completions have accelerated.
- Increasing completions is likely to have a moderating impact on housing rental prices (increasing housing inventory).
- Our inflation forecast assumes rental prices increase by 2.3% NTM.
- The major forecasters expect inflation to reach 1.2% in the NTM.
* Industrial production remains weak, down 1.1% saar in Aug-Oct.
- On the other hand, the PMI is up a point to 53.7 points, although export orders are down sharply.
- Revenues from retail trade are up by only 1% saar.
- We expect Q418 GDP growth to reach 2.5% saar.
- Revenues from the total economy increased by 2.8% saar in Aug-Oct.
* The BOI composite index (0.32% m/m in Nov) points to steady growth. The BoI stability report noted that Israel credit risk has declined due to steady growth and a long term decline in the debt/GDP ratio, although the higher primary deficit could pose a problem if growth slows.
* Business sector debt increased by 0.2% q/q in Q3 (to 69% GDP), while consumer deb increased by 1.0% to 42% GDP.
* Inflation forecast: Due to the sharp collapse of energy prices, we are currently expecting -0.3% m/m in January, although much uncertainty exists regarding Kachlon's ability to moderate price hikes in food items and energy.
* Monetary policy: At present, we expect a rate hold decision at the next rate decision on January 7th. The new Governor will devote his first MPC meeting to learn the ropes. It is more likely to envision a rate hike on February 25th, assuming the recent market meltdown shows some sign of stability.
* Politics: Large violent demonstrations on the Gaza border were renewed with four Palestinian killed trying to cross the border. The Judicial department appears to be approaching the indictment of the PM on corruption and breach of trust charges, which is likely to be announced in the near future.
* Important data this week: Today unemployment/labor survey for November will be released, as well as service exports for October. Wednesday: chain store sales for November.
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