The Bank of Israel prepares markets for aggressive tightening

ISRAEL - In Brief 27 Mar 2022 by Jonathan Katz

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The Deputy Governor suggests aggressive tightening ahead At a conference on Thursday, Andrew Abir said: “In view of recent developments in inflation and the increase in expectations, the process of monetary tapering may be more rapid than we thought.” Clearly, a rate hike on April 11th is to be expected, and we think we may see a series of rate hikes: at the end of May and in early July as well. We doubt the MPC will “pause” with inflation y/y expected to move even higher and reach around 4.5% by May and remain elevated for most of 2022. It is reasonable to expect policy rates at 1.25% by early 2023. Supporting monetary tightening will be a rapidly tightening labor market and fairly robust growth. We expect the tightening cycle to be rather short with inflation expected to slow considerably in 2023. Inflation in Israel has been much lower than that in the US for the past decade, due to the rapid appreciation of the shekel, a less accommodative fiscal policy (especially in the past two Covid years) coupled with less pronounced wage pressure. Increasing competition from e-commerce from abroad has kept domestic prices down, such as apparel prices and measures to open up imports will continue. Implications: Low inflation from 2023 onwards and a short tightening cycle is supportive of the long-end of the curve.Inflation expectations move higher - Following February’s CPI print, the major forecasters boosted their inflation forecast for the next 12 months to 2.9% (from 2.1%), due to the upward inflation surprise and the impact of the Ukraine conflict. Higher inflation expectations are supportive of monetary tightening.Hi tech service exports remain robust Hi-tech service exp...