The BoI prepares the market for imminent tightening

ISRAEL - In Brief 21 Feb 2022 by Jonathan Katz
The BoI prepares the market for imminent tightening Rates remained unchanged today (as expected) but the big news was the sharp shift in the forward guidance from “The Israeli economy’s process of recovery from the crisis continues. However, there are still challenges to economic activity. The Committee will therefore continue to conduct an accommodative monetary policy for a prolonged time” to “The Israeli economy recorded high growth alongside the COVID-19 virus, and various indicators point to continued strong activity. The Committee’s assessment therefore is that in the coming months, conditions will allow for the start of a gradual process of raising the interest rates” (our bold). The economic conditions mentioned in the monetary statement are all rate hike supportive: inflation is at the high-end of target, growth has been surprisingly robust (especially GDP numbers) and the labor market near full employment. This BoI assessment is key: “for the first time since the start of the COVID-19 crisis, the GDP level crossed the precrisis trendline” meaning GDP is above what was forecasted pre-Covid. We also note a somewhat more accentuated concern regarding rising housing prices: “The upward trend in home prices accelerated in recent months, with prices rising by 11.3 percent in the past 12 months, a significantly higher pace than in previous years.” In short, the BoI is preparing markets for monetary tightening “in the coming months”. We see April 11th as very likely, but cannot rule on late May for the first hike, with the second hike in Q322, and the third hike in late-2022 or early 2023.

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