News summary: On Monday, the Bank of Israel will decide whether to raise interest rates for the 11th time in a row • Later, the consumer price index for June will be published, and the expectation is for a further decrease in inflation.

The interest rate of the Bank of Israel is going to be the main story this week. The monetary committee will meet on Monday, and will have to decide whether to raise the interest rate of the Bank of Israel for the 11th time in a row. The interest rate, if it rises, will already stand at 5%, and will be the highest interest level since 2006.

● Contrary to rumors: the Bank of Israel did not intervene in the foreign exchange market in June

● The risk in the economy increased, and the banks increased credit to the big businesses at the expense of the small ones

It seems that a lot has changed since the Bank of Israel’s last interest rate decision, at the end of last May. Annual inflation for the first time fell below the Bank of Israel’s interest rate, and stood at 4.6%. Private consumption, which is fueling the sticky inflation in Israel, is slowly moderating, and we are finally seeing the high interest rates affect the market.

The employment market is still tight, but in light of the existing gap between the interest rate increases and their effects on the market, time may take its course without the need for another interest rate increase, which burdens the market and the citizens.

What moved the analysts’ forecasts?

The problem lies in the exchange rate of the shekel, which senior Bank of Israel officials and the governor have said numerous times regarding it that it is a component that can have the greatest impact on inflation. The exchange rate was low in the middle of June, and following the strengthening of the shekel, whose rate was 3.5 shekels to one dollar, the analysts expected with a very high probability that the upcoming decision would postpone the interest rate increase to a later date, and in fact that the upcoming interest rate decision would be skipped, so that the committee could see the continued effects of the interest rate on the economy.

But despite the positive expectations, the uncertainty in Israel has recently increased, the legal reform is back on the table and it seems that the consensus discussions at the President’s House have gone down the drain, so that there is no political certainty surrounding the reform.

And Samaria and the protests in the Golan have contributed to this uncertainty – although many believe that the small-scale military operation does not affect the exchange rate of the shekel. After the return of the shekel devaluation, it seems that the analysts’ forecasts have become mixed.

“The market is still pricing in a very low probability of an increase next week,” Modi Shafferer, Chief Strategist – Financial Markets, at Bank Hapoalim, tells Globes. However, he points out, there is a high probability that the Bank of Israel will raise the interest rate once more later this year, as a part of its war on inflation.

“The main component is, of course, inflation,” explains Shafferer, “inflation was lower than expected in May, the exchange rate did not rise too much, and therefore the Monetary Committee can afford to behave as it does in the US and other countries, and wait with another interest rate increase, especially in light of the decline in private consumption “.

Dr. Gil Bafman, Chief Economist at Bank Leumi, wrote in his latest market review that “against the continued trend of interest rate hikes in the world, and especially the weakening of the shekel, another interest rate hike in Israel cannot yet be completely ruled out, but probably not in the upcoming decision of Monday the nearest.”

After the May surprise: hope for a low index in June

Next Friday, the Consumer Price Index will be published, which will affect the future moves of the Bank of Israel. The index for the month of May surprised as mentioned for the better, placing Israel at an annual rate of only 4.6%. Now they hope for a further decrease in inflation.

Shafferer shows that the forecast for the June index is between 0.2% and 0.3%. A moderate increase which will bring the annual inflation to 4.45%.

“The prices of food without fruits and vegetables and the prices of meals in restaurants are expected to rise sharply, together with the rent prices,” explained Shaffer. The inflation forecast for one year from today is still positive, and analysts expect inflation to converge within the Bank of Israel’s target next year.

Source: Globes.co.il