The shekel weakens on market volatility

ISRAEL - In Brief 08 May 2022 by Jonathan Katz

We have revised our inflation forecast upwards to 3.3% NTM In the past, we factored in a modest shekel appreciation on the back of the strong CA surplus and net FDI. Currently, we think that equity market volatility is a more dominant factor impacting the shekel and therefore we are pricing shekel stability in our inflation forecast. Clearly, further downward market correction will push the shekel weaker. The FX pass-through on inflation is estimated at 0.14% for every 1% of shekel weakening. Other factors such as higher housing rental prices, wage pressure and elevated commodity prices also support higher inflation. Higher inflation will support more aggressive tightening. We currently see policy rates reaching 2% one year from now.Private sector wages are increasing by 6% annually We think the BoI has it wrong when it states that wage growth is “back to the pre-Covid pace”. This ignores the difference between public sector wages (up 1.7% annual and currently wage agreements are frozen) and private sector wages (up 6.3%).Unemployment declined due to lower labor participation. Unemployment declined to 2.9% in the 1st half of April from 3.4% in March due to lower labor participation, not employment growth. Bi-monthly data is often volatile (and not seasonally adjusted). Generally, the labor market is approaching full employment.Hi-tech service exports expand rapidly In February, hi-tech service exports increased by 5% m/m and 17% y/y. This important growth driver is expected to moderate with softening technology growth (lower equity valuations) abroad. The composite index increased by 0.2% in March. The Bank of Israel sees a minimal impact from the war in Ukraine on gro...

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