Rafi Gozlan (Facebook photo/ IBI Investment House)
Rafi Gozlan, the chief economist of the IBI investment house, estimates that the Bank of Israel is close to exhausting interest rate increases and will raise it by another 0.25% just one more time this year. According to Guzlan, the rate of inflation will moderate not before the second half of the year.
“The Monetary Committee decided to raise the interest rate by 25 basis points to 4.5%, in accordance with the early estimates. Contrary to the previous decisions, the committee accompanied the decision with a “June” message that signals an imminent end to the interest rate hikes, if there is no significant upward surprise in the expected inflation trajectory.
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“Actually, the committee aligns itself with the Fed, which also signals an expectation of maximizing interest rate increases, although both in the US and in Israel this assessment is based on an expectation of moderate effects on activity that will lead to a decrease in inflation, while in Israel, beyond the “sticky” inflation, The devaluation of the exchange rate is another risk factor for the forecast. In our estimation, a clear step-down in inflation, in the manner directed by the governor, will arrive in the second half of the year at the earliest, and therefore we expect at least one more increase of 25 basis points in the interest rate in the next decisions.
“The research department’s growth forecast for 2023 was updated once again downward to 2.5%, and this at the same time as an upward update to the inflation forecasts (3.9% in 2023 and 3.4% in the coming year) and the interest rate (4.75% in the coming year). In addition, scenarios were presented are possible to examine the effect of legislative changes in the legal system on activity, and they include a step increase in the economy’s risk premium and a lateral impact on demand, the intensity of which ranges from a 0.8% to 2.8% impact on growth in each of the next 3 years,” says Gozlan.
“Beyond the slowdown in the rate of interest rate increases,” he adds, “the committee will send a clear “June” message regarding the future interest rate path. Thus, the future guidance is no longer aimed at a protracted interest rate increase process in which the committee was mainly required to decide on the rate of increase, but is aimed at examining the need for further interest rate increases, And this depends on the data.
“This change indicates that the committee feels relatively comfortable with the current interest rate environment, so that without significant surprises in upward inflation, it is aiming for an imminent end to interest rate increases, and most likely one more increase according to the research forecast.
“Inflation figures for the past two months were considerably higher than market expectations and the bank’s estimates, so the committee noted that the annual inflation rate did moderate, but at a lower rate than previous estimates, and this development strengthened the estimate of “sticky” inflation. Thus, according to the bank’s estimate, despite a decrease Slight in the annual inflation rate, the percentage of items in the consumer price index that rose above 5% in the last year increased a step in the last two months (to about 58-57%), which indicates a more horizontal increase in inflation.
“This development is pretty much the same as the rest of the world, so although the rate of general inflation moderates, as far as core inflation is concerned, the rate remains high both in the US and in particular in the Eurozone, and actually hovers around the local level.
“In terms of reference to real activity, the tone was slightly less positive than in the previous decision. In the committee’s estimation, the growth rate of the economy is moving around the trend, and the economy continues to be characterized by a tight labor market while there is a certain decrease in the scope of vacancies, but they are still moving at a high level. It is likely that the less tone Optimistic also reflects uncertainty regarding the effects of the legislation on business and consumer confidence, and uncertainty regarding the intensity of the impact of the banking crisis in the US and Europe on global activity.
“This assessment was accompanied by a further reduction in the growth forecast for 2023 (from 2.8% to 2.5%) mainly due to an assessment of a more moderate increase in local demand against the backdrop of a higher interest rate and inflation environment than previously estimated. Also, the inflation forecast was significantly updated towards increased from 3% to 3.9% in 2023, and for the coming year the research department’s forecast is for an increase of 3.4%. At the same time, the interest rate forecast for the coming year was updated to 4.75% (compared to 4% for the end of 2023 in the previous forecast).
“It is important to note that this forecast assumes “business as usual” and does not include damage to activity due to the legislation to weaken the judicial system. The scenarios presented by the research department for potential damage in a situation where the legislation is passed in its current form, include an estimate of damage ranging from 0.8% to 2.8% GDP in each of 3 the next few years, depending on the strength and persistence of the shock. These scenarios reflect a step increase in the economy’s risk premium and a lateral impact on local demand and export activity, and the emphasis of the research department is that the more the changes in the legal structure are perceived as permanent, the greater their impact is expected to be, already in the current period, And not only over time,” Gozlan concludes.
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