Shekel appreciation continues; expected to moderate inflation

ISRAEL - In Brief 21 Nov 2021 by Jonathan Katz

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GDP data in Q3 was “decent” GDP growth reached 2.4%, but was up 3.5% excluding taxes on imports. Private consumption excluding durables increased by 5.1%. Investments improved, both residential and non-residential. Exports disappointed Annual GDP growth in 2021 will mostly come in closer to 6.5% and not reach 7% (as the BoI and MoF are forecasting). Therefore, cumulative growth in 2020-2021 will reach about 4%-4.5%, way below Israel’s growth potential. Bottom line: The output gap will remain wide into 2022, supportive of a fairly moderate inflationary environment (beyond transitory factors). Inflation in October surprised on the downside October’s CPI increased by only 0.1% m/m below expectations of 0.4%. Travel abroad costs declined by a sharp 7.9% contributing -0.3% Core inflation is up 2.1% y/y and headline inflation up 2.3%, low compared to most DM. Looking forward, we expect inflation to reach 1.5% NTM as the rapidly appreciating shekel offsets in part other inflationary pressures from housing rentals, wage pressures and higher energy costs. Job vacancies continued to move higher, reaching 143k in October, from 136k in September and 100k before the crisis. This trend supports wage pressures. Broad unemployment declined to 7% in October from 7.9% in September. FX: The shekel continued to appreciate last week, especially against the Euro (1.9%) due to USD global strengthening, as well as against the dollar (0.9%). The shekel has appreciated by 3.9% against the basket of currencies since the beginning of November. This will moderate inflation with the current estimated pass-through at 0.15. Monetary policy: We do not expect a rate change today. We do expect a rather ...