Signs of inflation moderation

ISRAEL - In Brief 16 Jul 2023 by Jonathan Katz

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Inflation in June surprised on the downside (as it did May) Core inflation slowed to 4.5% y/y from 4.9% in May and 5.3% in April. Prices of both goods and services (rental prices especially) have decelerated. We expect inflation to reach 2.6% in the coming year, as domestic demand slows, housing rental prices decelerate and the shekel appreciates modestly. The trade deficit contracts in Q223 Exports increased by 8.9% q/q on strong defense exports (up 88%!) Meanwhile, imports have declined modestly (in dollar terms). Positive trade numbers for April-June point to a lower trade deficit in Q223, which will support GDP growth as well as the CA surplus. Macro fundamentals remain shekel positive, assuming the political uncertainty dissipates. We see the shekel reaching 3.55/USD NTM. Monetary policy: Rate remained stable last week, with the BoI noting signs of slowing growth as well as slowing inflation (looking at the last three months annualized). Nevertheless, this was expressed as a “pause” with further tightening dependent on the incoming data (and especially the shekel). We expect rate stability at 4.75% through 2023, and then a gradual loosening trend starting in early 2024, with rate reaching 4.0% by year-end. FX: The shekel appreciated sharply last week by 2.9% against the USD as markets are expecting a more modest version of the “reasonableness clause” cancellation in the final vote. In May, Israel savings institutions increased their FX exposure to 19.2% from 19.0% in April and 14.5% in October 2022, on the back of increased domestic risk due to the judicial overhaul initiatives. Politics: Markets continued to react sharply to domestic political news and expectatio...