After the most recent CPI surprised to the downside, and the annual inflation rate declined to 3.3 percent in July, most economists expect the Bank of Israel interest rate to remain unchanged tomorrow at 4.75 percent. This was after the Bank of Israel interest rate remained in place in July as well, at its highest level since December 2006.
According to the interest rate market, there is only a probability of about 20 percent that the interest rate will be increased by 0.25 percent tomorrow, and of about 80 percent that it will remain unchanged.
His decision. Bank of Israel Governor Amir Yaron, Photo: Oren Ben Hakon
The Bank of Israel began the process of raising interest rates in April last year in order to curb runaway inflation, which peaked at 5.4 percent, the annual rate of increase recorded in January of this year. Since January, inflation has been on a consistent downward trend, making the Bank of Israel's decision relatively easy.
Will you jump next month?
However, the depreciation of the shekel in recent weeks is liable to delay the process of restraining inflation and add a factor of uncertainty in the upcoming interest rate decision as well. We turned to macro experts to understand what will affect the Governor's decision tomorrow and what the interest rate is expected to be in the future.
Interest rate cuts in 2024?
Modi Shafrir, chief market strategist at Bank Hapoalim's trading room, estimates that the Bank of Israel will leave the interest rate unchanged at 4.75 percent. "Despite the moderation of inflation and the series of downward surprises in the past three months, the market is pricing in a probability of about 20 percent that the Bank of Israel will raise the interest rate. Our assessment is that the Bank of Israel will leave the interest rate unchanged," he says.
, will his rise make a difference?
"At the same time, we agree with market assessments, as of Friday, of a probability of about 30 percent of an interest rate increase in October, against the background of the fact that the interest rate decision on October 23 will be made after the publication of the August and September CPIs, which are expected to raise the annual inflation level to about 4 percent, and in view of the existing risk of continued weakening of the shekel (after the High Court of Justice hearing on the grounds of reasonableness and the Knesset's return from recess)."
Asked when interest rates are expected to start falling, Shafrir says, "The market is now pricing in a cut to 4.50 per cent in May 2024 and another cut to 4.25 per cent in July 2024."
Ronen Menachem, chief market economist at Mizrahi Tefahot Bank, also assesses that the Bank of Israel is expected to leave the interest rate unchanged tomorrow. "It cannot be completely ruled out that the interest rate will rise by a quarter of a percent, but the likelihood of that happening is small," he says.
Menachem explains: "On the one hand, the depreciation of the shekel against the dollar is challenging, since according to the Bank of Israel, the shekel is overdepreciating by at least 10 percent, and this creates inflationary pressures. The rapid increase in the budget deficit—including on the expenditure side—and assessments that it will continue, also support a further increase in the interest rate. On the other hand, the inflation rate declined in recent months, focusing on the housing component, and low compared to inflation abroad. Core inflation in Israel is markedly lower than in the US."
However, according to Menachem, the decline in inflation was mainly "technical" and stems from the fact that high CPI readings from last year were out of the calculation. "Inflation will revise upward again to the 4% area next month. The Bank of Israel was not 'impressed' by the decline and will not rush to respond to the recurring increase."
Menachem further notes that "September may be a test for the foreign exchange market in light of the legal discussions planned during it. The security environment has also recently escalated, and to the extent that it continues, God forbid, or expands, it will also act to weaken the shekel. Therefore, it will be important, alongside the interest rate decision itself, to read the explanatory notes and look for clues regarding what the Bank of Israel will focus on in the coming months.
"At the same time, we are waiting for the governor's announcement on whether he will continue in his position. This personal issue could also have an impact on the foreign exchange market and indirectly on interest rate policy in the coming months."
Moderation in consumption
Jonathan Katz, chief economist at Leader Capital Markets, also assesses that the Bank of Israel is expected to announce a non-change in the interest rate tomorrow. "The Bank of Israel is expected to emphasize the trend of moderation in inflation in recent months. The May–July CPI readings were lower than the average of private forecasters' expectations. Factors supporting the decision include signs of moderation in activity (according to revenue in industries), particularly moderation in private consumption."
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