The BoI prepares markets for a tightening cycle

ISRAEL - In Brief 27 Feb 2022 by Jonathan Katz
The BoI is clearly signaling for an imminent hike Rates remained stable last week, but the FG was revised significantly to suggest tightening “in the coming months”. This more hawkish bias is due to both higher-than-expected inflation in December and January and very robust growth numbers. The labor market improved in January despite the Omicron wave. The BoI expressed concern regarding further acceleration in housing prices. We expect the first hike in April, the second in August and the third towards end-year or early 2023. We see the tightening cycle as a fairly shallow one, with inflation expected to moderate in 2023 and beyond (see below).Inflation is expected to accelerate in the short run. We have revised our monthly inflation forecast upwards due to higher petrol prices, a slightly weaker shekel and higher prices for flights abroad with most restrictions being lifted. We now expect inflation to reach 0.6% m/m in both March and April (following 0.5% in February). Inflation y/y is expected to reach 3.7% y/y in April.We see inflation moderating in the longer term (from 2023): Macro fundamentals will continue to support shekel appreciation. Residential housing investments have expanded sharply which should alleviate the housing shortage, slowing the pace of housing rental prices. Measures to reduce the cost of living such as opening up imports of fresh produce will be pursued. On the other hand, a tight labor market will support wage pressure, and public sector wage increases are to be expected. We expect inflation to moderate to 1.5% in 2023 and remain in the 1.5%-2% range in coming years.Credit purchases in February (through 21.2) increased by 2.5% m/m, especiall...

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