The decision to raise the interest rate was made unanimously – the wording of the summary of the discussions at the Bank of Israel does not, in our opinion, indicate a particularly hawkish line at the moment.
Just before Passover, the consumer price index March rose 0.6 percent, slightly lower than earlier estimates. A seasonal increase was recorded in the housing (0.7%), recreation (3%) and clothing (5%) items, in parallel with a sharp rise in fuel prices following the war in Eastern Europe. Price index the food Surprised when it remained unchanged, but in our estimation it will rise rapidly in the following indices with the end of operations after Passover and the jump in the prices of inputs in the world. According to initial estimates we expect a 0.7 percent increase In the April index Due to a seasonal increase in holiday prices for Passover, an increase in fuel prices (before the excise tax reduction) and an increase in food prices. In the May index We expect an increase of about 0.5-0.4 percent, a decrease in the price of fuel and electricity versus an increase in the prices of clothing and food.
Inflation in the last 12 months has remained unchanged at 3.5 percent, but we estimate that it will rise in the coming months and reach around 4 percent. And will remain beyond the limits of the Bank of Israel’s inflation target for the next 12 months. Yet, In our estimationThe index does not support a rapid rise in interest rates against the background of relatively moderate core inflation (2.3 percent excluding energy, vehicles and actions initiated by the government) and against the background of fears of a renewed strengthening of the shekel. Summaries of the discussions The Bank of Israel’s interest rate decision showed that all members of the Monetary Committee supported a one-quarter percentage point increase. It was further stated that the committee supports the gradual process of raising the interest rate and will respond in accordance with the developments in the data (a standard wording that does not indicate a hawkish line). This confirms our estimate that the interest rate in about a year will be about 1 percentage point higher, slightly lower than the route derived from the markets.
Apartment prices continue to rise – however, the beginning of the process of raising interest rates, increasing the tax rate and price increases we have already seen are expected to moderate demand later this year
Housing Price Index Continued to rise by 1.8 percent (between mid-January and mid-February 2022), so that in the last 12 months house prices have soared by 15.2 percent. The aliyah also contributed to this In the construction input index Affected by the jump in commodity prices following the war in Eastern Europe, with an increase of 1 percent in March and 6.6 percent in the last 12 months.
Yet, In our estimationStart of process Raising interest ratesIncreasing the tax rate, side by side The sharp rise in yields The bond that rolls to the rise of theMortgage rates And the price increases we have already seen are expected to moderate demand later this year.
In the world
IMF forecast for global growth updated downwards – Commodity exporters actually strengthen
Since the outbreak of the war in Ukraine growth forecasts have been updated downwards and inflation upwards, so too International Monetary Fund Forecast Which forecast a growth of 3.6 percent this year and next year, as a percentage point less compared to the forecast from 3 months ago. Most of the blame comes From the eurozone (2.8%) and emerging markets (Russia) alongside lower growth In China (4.4%). Stood out positively U.S With a slight downward update (3.7%), alongside commodity exporters such as Brazil, Nigeria And Saudi Arabia Who benefit from the jump in commodity prices. The fund does not anticipate a recession in the major economies but the risks are tilted downwards in the event of a rapid monetary tightening of central banks as a result of rising inflation.
In the US – intend to press the brakes on both feet
In the US Inflation Continues to rise and stood at 8.5 percent in March (40-year high), In our estimation It will moderate in the coming months, but it will remain above the central bank target at least until the end of next year. Wage increases and the fact that in contrast to Europe a large part of inflation in the US No Coming only from energy prices urges the central bank to act quickly. As previously noted we expect an increase of Half a percentage point At the next meetings of the Monetary Committee a scenario that has already been reflected in the markets, which now expect the short-term interest rate to stand at almost 3 per cent by the end of the year. The move will slow growth towards the end of the year in light of the lagging effect of interest rate hikes on the economy but it is too early to talk about a recession.
In Europe – currently the decline in morbidity compensates for the damage from the war
Despite the war Corporate sentiment In the eurozone Remained strong in April, according to Purchasing Managers’ Index Which rose to ‑55.8 points (initial estimate). The removal of corona restrictions has led to an increase in demand, with an emphasis on the hospitality and leisure culture industries. On the other hand, in the absence of an increase in income, demand comes at the expense of product consumption and thus there has been a decline in demand in the manufacturing industry, which continues to suffer from supply disruptions exacerbated as a result of the war in Eastern Europe. IMF estimates that Europe will not slip into recession on the side High inflation (7.4% in March and 2.9% without energy and food) will lead in our estimation the Central Bank of the Eurozone Raise interest rates this year. The bank did signal in the decision Interest Before Pesach That it is expected to complete its acquisition plan around the summer, signaling the possibility of an interest rate hike nearby. However, in our estimation the markets are pricing a rapid rate hike this year that does not take into account the impact of the war that will be reflected later.
In China – one has to choose restrictions or growth, both are impossible
Growth in China The first quarter was better than earlier estimates, with GDP up 4.8 percent from the same quarter last year. But it is important to remember That the strict closures Started only at the end of the quarter and that the negative impact is only beginning to be reflected in the data. for example Retail sales March fell 3.5 percent (compared to March last year). Therefore the growth forecasts for China (IMF = 4.4%) have been updated downwards. Apart from the damage to the services industries as a result of the closures, the slowdown in the real estate market continues in this way Apartment sales March is 29 percent lower than March last year. This supports our assessment of the decline in raw material prices for industry later this year. from this Central Bank of China Reduced the reserve ratio for banks by 0.25 percentage points (0.5% for small banks), a move equivalent to a reduction in interest rates. In our estimation, now, almost a month after the start of the closure, the chances of a reduction in interest rates are also increasing.
The author is the head of the Economics and Research Division at Harel Insurance and Finance