We expect a seasonally high CPI in May

ISRAEL - Report 10 Jun 2019 by Jonathan Katz

The fiscal deficit stands at 3.8 % GDP LTM, with rapid expenditures and slow tax growth. Wage pressure continues, fueled by a tight labor market. We expect a high CPI print in May (to be published on Friday), at the high end of consensus.

Wage pressure continues into Q1 2019.
- Average wages are up 0.5% m/m in March and 3.8% y/y.
- Wage pressure is being fueled by a tight labor market.
- Wage pressure is viewed by the MPC as inflationary.
- Shekel appreciation has offset some of this impact.

The fiscal deficit reached 3.8% of GDP LTM in May.
- Expenditure growth has been rapid this year, and tax revenues weak.

The Business Tendency Survey suggests steady growth into Q2 2019.

The number of incoming tourists slowed modestly in May.

The BoI purchased 50ml USD in May, following no intervention in January-April.

Inflation forecast: We currently expect inflation to reach 1.3% in the next 12 months, as we assume a slightly weaker shekel (see below) and more tax hikes in early 2020 due to the expanding fiscal deficit. We are assuming an impact of 0.4% on inflation in Q1 2020 (including VAT by 1%). On the other hand, lower global oil prices will moderate inflation in June and July.

Monetary policy: Our base scenario assumes rate stability this year, but much will depend on the shekel. If the shekel weakens somewhat, and inflation drifts higher towards 1.5% y/y, a rate hike sometime this year remains a possibility. Much will also depend on the global environment, which is looking increasingly problematic (downside risks).

Politics: Israel is going to another round of elections on September 17th. Due to the animosity between Lieberman and Netanyahu (with the ultra-religious parties), it will not be easy for these two to work together in the future. Due to the fragmentation of Israeli politics, it is not at all clear that a stable coalition will be formed following the next election. According to recent polls, Lieberman may receive up to 10 seats this time, compared to 5 seats in the last elections. Further political instability could result in a weaker shekel and higher bond yields.

Important data this week: Wednesday: Trade data (May), Thursday: New home sales (April), Friday: CPI for May. We expect an index of 0.6% m/m (1.4% y/y) due to a spike in prices of fresh produce (4.3%) and clothing (8.2%), in addition to the 3% increase in petrol prices. Our inflation forecast for May is at the high end of market consensus.

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