Leumi Economists, led by Chief Economist Dr. Michael Befman, publish a weekly macroeconomics review, noting that “the Bank of Israel’s interest rate announcement this week revealed that Israel’s overall economic situation is good and therefore the reduction in growth forecasts was relatively minor. In addition, the expectation is for a slowdown in the inflation environment into 2023, after the 2022 acceleration. It seems that so far the Bank of Israel has enjoyed relatively many degrees of freedom in managing the process of raising interest rates, also against the background of the weakening of the shekel, especially against the dollar, since the beginning of the year. In the coming months, against the background of the possibility of a renewed strengthening of the shekel and the expectation of a certain decline in the inflation environment, it seems that the Bank of Israel will be more challenged in everything related to a rapid and sharp rise in interest rates. The recent decline in medium- and long-term inflation expectations indicates the market’s confidence in its ability to reduce inflation in the future. This, while decreasing leading indicators of inflation, when it comes to future rather than immediate effect. Against this background, it appears that interest rate hikes later in the year are expected to be around the level of 25 bps per hike.
The review also emphasized: “Against the background of accelerating inflation around the world, inflation in Israel has remained among the lowest among OECD countries. In other words, an analysis of inflation in an international comparison shows that inflation in Israel is low compared to most developed countries. OECD data show The change in the consumer price index in the last 12 months) in the countries of the organization, rose in May 2022 to 9.6% from 9.2% in April and 3.9% in May 2021. This is the highest rate since the 1990s, which indicates the environment High global inflation and a continuing upward trend at present, against the background of rising energy and food prices, partly due to the effects of the war in Ukraine. After deducting energy and fruits and vegetables, among OECD countries it rose in May from 6.2% to 6.4% (annual rate). This means that the pressures for price increases are horizontal and cover most areas of activity.
Israel remains one of the countries with the lowest inflation in the OECD at the moment, along with Switzerland and Japan, similar to the trend in recent years. “A development which is, among other things, a result of the relatively low sensitivity of electricity prices in Israel to world energy prices, and the high level of prices in Israel in the first place compared to the world.”