The economic department of Bank Hapoalim in a review of the local market, the economic slowdown from the world has not yet penetrated Israel. It can be seen that private consumption grew at a slower rate in recent months, and in June even credit card purchases decreased. On the other hand, during this period there was a sharp increase in the departures of Israelis abroad, and the number of overnight stays by Israelis in hotels in June was 18% higher than in the corresponding month in 2019. Inflation in Israel is lower than in the world, so the damage to purchasing power takes more time to affect The activity data, what’s more, the labor market is tight. Growth in Israel in the second quarter is not expected to be high, but probably not as negative as in the US. We estimate that two factors improve Israel’s situation in relation to the US and Europe: non-dependence on natural gas prices and a good budgetary situation that allows the government to moderate the damage to households, at least in the short term.
The labor market returned to full employment – the unemployment rate fell in June to 3.4%, and the employment rate returned to the pre-coronavirus level. Wage pressures in the labor market are high and there is an increasing difficulty in filling jobs even for unskilled workers. We estimate that the salary will have a substantial impact on inflation, and will prevent it from falling to the center of the target in the coming year.
The slowdown in the world curbs the inflation that Israel imports from the world, so for example we see a continuous decrease in freight prices and commodity prices. At the same time, some of the price increases have not yet been fully reflected in the consumer price indices, whether it is because of a government policy that curbed some of the price increases or stocks that existed that allowed the postponement of price increases. The fuel price for the month of August was published today, and it includes a reduction of about half a shekel in the excise tax. For now, the reduction is for one month, but it is likely that the Treasury will try to extend it. The Electricity Authority moderated the electricity price increase in August to a rate of 8.6%. These changes, as well as the increase in the exchange rate, significantly reduce the estimated increase in the consumer price index for the month of August to a rate of 0.0%. We reduce the inflation forecast for the coming year to a rate of 2.8%, this in light of the reduction in the price of fuel and the increase in the exchange rate.
The increase in stock prices in the world accelerated the appreciation of the exchange rate. In July, the Yosef Shekel fell by a sharp 3.3% against the basket of currencies, with in the background foreign exchange sales by institutions that hedge their asset portfolios abroad. We continue to assess that the fundamental factors support a strong shekel over time.
Towards another increase of half a percent in the Bank of Israel interest rate on August 22. The dose of the interest rate increase is lower than that of the Fed and the interest gap between the Fed interest rate and the Bank of Israel interest rate is widening. This gap largely reflects the lower inflation in Israel at the moment. The market now embodies an increase in interest rates to the level of 3.0% within a year. At this time, the interest rate in Israel is expected to be similar to that in the US, except that there the interest rate will already be on a downward trend.
A sharp drop in long-term yields – the ten-year yield dropped to 2.5%, compared to 3.3% in mid-June. The drop in yields was influenced by the world, although as we mentioned the risks of recession in Israel are not similar to those in the world at the current point in time. The Bank of Israel interest rate is expected to reach 2.25% in about three months, meaning the curve was very flat.