A rate hike appears increasingly possible on May 20th
We currently see a 50% probability of a rate hike on May 20th due to robust growth and accelerating inflation. We see inflation stabilizing at 1.5% y/y in April and in May. Netanyahu is working on a two-year fiscal scheme in 2020-2021 in order to support political stability through 2022.
Highlights:
* No economic data was released last week (due to the holidays).
- The shekel did weaken by 1.1% against the dollar and by 0.2% against the Euro.
- In May, the MoF will issue 4.5bn ILS in tradeable bonds compared to bond redemptions of 14.9bn. Excess redemption is likely to support institutional demand for government bonds.
- Netanyahu is seeking to implement a two-year budget scheme for 2020-2021 in order to insure stability for his coalition until March 2022. Two-year fiscal frameworks have been rather common in recent years.
- In order to find new fiscal revenues and reduce the deficit, the MoF and the tax authorities are working on a plan to tax internet companies such as Google and Facebook by 2%-5% on their turnover, as exists in France.
* Monetary policy: In the past few weeks, we have been hesitating regarding the possibility of a rate hike on May 20th. Currently we see an even chance of a rate hike, under the following conditions:
- The global environment improves somewhat (a trade agreement between the US and China would contribute to that).
- The shekel stabilizes (or weakens modestly). The shekel has weakened by 0.6% since the last rate decision (against the basket).
- Q1 2019 GDP growth is above 4% (as we expect). We note robust export growth and PC demand (especially new vehicle purchases, before higher tax rates took effect on April 1).
- April's CPI comes in at 1.5% y/y or higher (we expect 1.5%). Market expectations are in the 1.4% y/y-1.6% y/y range.
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