In the weekly economic review “This Week in Macro”, by the Economics Division in Leumi’s Capital Markets Division, headed by Dr. Gil Michael Bafman, inflation expectations for the year ahead are on a downward trend in recent months.
According to Bank of Israel data, inflation expectations for the year ahead, from all sources in Israel, have been declining in recent months, and they are all within the price stability target range (1%-3%), in the upper part. Apparently a combination of global and local factors led to a decrease in inflation expectations for the year ahead.
More in-
Inflation expectations are one of many components within the monetary committee’s basket of background conditions when it comes to examining the possibility of changes in the interest rate level, so the decrease in inflation expectations for the coming year, in itself, reduces the motivation to raise interest rates. However, as stated above, apart from this variable, the monetary committee examines other factors such as: actual inflation, the level of activity in the economy and developments in the labor market (topics we expanded on in the previous paragraphs), forecasts for global economic activity, the policy mix, and more.
Looking ahead, we estimate that another interest rate increase by the Bank of Israel, of 0.25% in the upcoming decision (20.2), to a level of 4.00%, where the interest rate is expected to remain during the current year, is expected in a key scenario. But in the event of a pessimistic scenario, originating from the local economy, the global economy or a combination of factors, the interest rate could be higher.