Rate hike of 0.25% surprises the markets

ISRAEL - In Brief 11 Apr 2022 by Jonathan Katz

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Rate hike of 0.25% surprises the markets The Bank of Israel decided to hike by 0.25% to 0.35% today, while markets (and myself) had expected a hike of 0.15% to 0.25%, although I saw a 35% probability of a 0.40% hike to 0.5%. The more hawkish bias is due to a combination of accelerating inflation (not only the result of supply issues but more broad based with strong demand as well), and a rather robust economy with growth surprising on the upside in 2021 (17% growth in Q421) and continuing in early 2022 as the output gap has basically closed. The labor market has recovered rapidly although the Bank of Israel does not yet see excessive wage growth (basically back to pre-Covid pace).The Governor stressed that inflation still remains below most OECD countries. The economic forecast of the BoI Research Department expects policy rates to reach 1.5% one year from now (in January the forecast was for 0.1%-0.25% in January 2023), with inflation reaching 3.1% one year from now (similar to our forecast). Inflation is expected to moderate to 2% in 2023.GDP growth is expected to reach 5.5% this year and 4.0% in 2023, with the fiscal deficit at 1.4% GDP this year and 2.3% next year. The public debt/GDP will decline to 65% in 2023 from 69% in 2021. Unemployment will average 3.5% this year and 3.4% in 2023, as Israel returns to full employment. We expect rates to continue to move higher in the next policy rate decisions to a level of 1.25% by end-2022 and 1.5% one year from now, in line with the Bank of Israel forecast. Nevertheless, further tightening in 2023 and beyond will be rather limited as we expect inflation to moderate on the back of a stronger shekel and measures to reduce t...