Robust growth supports monetary tightening

ISRAEL - In Brief 20 Feb 2022 by Jonathan Katz
The Israeli economy expanded by 8.1% in 2021 Annual GDP growth in Q421 reached 16.6% following 6.7% in Q321. The level of GDP in Q421 is 8.9% above Q419 (pre-Covid), basically reflecting rapid annual growth of above Israel’s estimated growth potential of 4%. The output gap is rapidly closing. Labor productivity in the private sector increased by 2.5% in 2021 following 6.5% in 2020. The BoI monthly GDP model sees growth in January reaching 4.2%.Inflation in January surprises slightly on the upside Inflation reached (0.2% m/m) and 3.1% y/y, from 2.8% in December. Core inflation remained stable at 2.7% y/y, and core inflation excluding government measures a lower 2.4%. We expect inflation to reach 1.9% NTM due to higher rental prices, accelerating wage pressure and higher energy costs, partially offset by a modest shekel appreciation.In January, the number of job vacancies reached 146k up from 143k three months ago and 95k pre-Covid; supportive of wage pressure.FX: The shekel appreciated against the basket by 1.2% last week, most likely impacted by rather positive GDP numbers and Intel’s announcement that it will be purchase Tower Semiconductors for 5.4bn USD. Israeli institutions purchased 1.6bn USD in December, and probably even more in January due to market volatility (decline). Monetary policy: Our initially bold call for a rate hike on April 11th now appears more in line with market consensus, with both the high inflation environment (3.3% y/y expected in February, the last CPI print available on April 11th) and rather robust economic expansion (GDP print), as well as strong labour data all support monetary tightening. Today BOI’s statement to hint that monetary poli...

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