The German bank Deutsche Bank expects 2 more interest rate hikes this year, and estimates that the first interest rate hike will arrive on April 11 (15 basis points), followed by 3 more interest rate hikes of 25 basis points each – in May, July and October. So if this forecast does materialize, the Bank of Israel’s interest rate will be 1% at the end of the year (compared to their previous half-percent expectation). This, in light of the recent upward surprise in the latest figure of the Consumer Price Index for February.
The Bank justifies their forecast for a more aggressive monetary tightening in order to reflect their upwardly updated inflation forecast and affected by the war between Ukraine and Russia and a denser labor market as well as strong economic growth.
Inflation: The consumer price index is expected to reach 4% in April-May compared to the same period last year
The consumer price index rose in February by 0.7% to a level of 3.5% compared to the corresponding month last year and a 3.1% increase in January. According to the bank’s economists, the figure exceeded their and the market’s expectations for an increase of 3.3%. The consumer price index has now reached its highest level since June 2011. The core price index (the consumer price index minus energy, fruits and vegetables) increased by 3% compared to February last year and an increase of 2.7% in January. The increase in the consumer price index is due to an increase in the prices of transportation, vegetables, fruits and housekeeping (mainly due to the increase in electricity prices).
The Bank believes that the consumer price index will reach a level of 4% over the months of March-April in light of the jump in energy prices and the depreciation of the shekel, as we explained above. The consumer price index is expected to remain above 3.5% throughout 2022 in light of high food and energy prices. Our inflation target for the end of 2022 is 3.5% (previously 3%).
Monetary Policy: Expect more interest rate hikes faster
Following the interest rate decision of February 21, the Bank of Israel referred to the fact that the growth rate of 8.2% in 2021 was above its growth forecast. More importantly, the bank noted that the growth rate of GDP first crossed the pre-corona trend line. In other words the output gap started to have inflationary consequences. The unemployment rate fell to 3.8% and the broad unemployment rate (including workers in the IRS following the corona) fell to its lowest level, 5.5% in the first half of February. January The rate of employment is approaching its pre-crisis level at 2019 levels.
“We believe that the crowded labor market will put upward pressure on wages in the coming months in light of the fact that the number of vacancies continued to rise in February. The Governor of the Bank of Israel, Amir Yaron The possibility that a first interest rate hike may come in April and further interest rate hikes following the war between Russia and Ukraine.The upward surprise in the CPI in February, made us confident that the Bank of Israel will raise interest rates at its April 11 meeting with subsequent interest rate hikes. Of May 23, July 4 and October 3.
In light of our expectation of a higher inflation environment, a denser labor market and stronger economic activity, we are now marking 2 additional interest rate hikes: 15 basis points on 11 April and 25 basis points on 4 July in addition to 2 interest rate hikes of 25 basis points in May 23 and October 3. In conclusion, we expect the Bank of Israel to raise the Bank’s interest rate by 15 basis points to 0.25% on 11 April, 25 basis points to 0.5% on 23 May, 25 basis points to 0.75% on 4 July and 25 basis points. At an interest rate of 1% on October 3rd. “Our interest rate forecast for the end of the year is now 1% (previously 0.5%) compared to the current interest rate of 0.1%,” the German bank concludes.
Comments on the article(0):
Your response has been received and will be published subject to system policies.
Thanks.
For a new response
Your response was not sent due to a communication problem, please try again.
Return to comment