| Guy Beit-Or, Godeconomist Godmain of the peaks of an investment house |
There were no special surprises in the month of November, when inflation in Israel continues to accelerate and, at least in our estimation, it has not yet reached its peak. The annual inflation rate accelerated from 5.1% to 5.3%, but more importantly, core inflation accelerated from 5.0% to 5.3%, and service sector inflation accelerated from 5.7% to 6.3%.
The main story in the November index was again the housing section which jumped another 0.6% and completed an annual rate of 6.4% when from month to month every contract opened in the CBS sample is renewed at much higher price levels (recall that each month only a few percent of the CBS sample renewing a contract or changing a tenant). The bad news is that the prices in the housing section of the index react significantly behind what is happening in the actual real estate market, which will keep the general inflationary environment in Israel higher over time.
The good news is (depending on which side of the deal you are on) that the Israeli real estate market is in an advanced process of cooling down with a significant decrease in activity and the movement of buyers. This means that during the first half of 2023 we will already begin to see price drops in the real estate market, which at the end of This will also be rolled out at a later stage into the rental market. However, another vision for the time since in the meantime housing prices in Israel continue to accelerate with another 1.2% in transactions signed in the months of September-October, completing an annual increase of 20.3% acceleration compared to last month when they stood at 19.8%.
The second problematic component is of course the food section where the annual rate accelerated from 5.0% to 5.5% when looking ahead, the many publications in the media over the past few days signal that the price increases in the food market are still ahead, so these developments continue to be a major risk as far as the upcoming indices are concerned .
At the same time, the producer price index in Israel jumped by 1.2% in November, among other things, the food product production output index jumped by 0.8% and 7.6% in the last year, signaling that price increases in the food sector are still expected to continue.
What can be learned from the November index as far as the Bank of Israel is concerned?
What bothered the Bank of Israel in the previous decision is still expected to bother it in the upcoming decision as well – core inflation, and inflation in the service sectors continues to be high and accelerating – note that unlike the USA, Europe and the UK, in Israel we have not yet reached peak inflation, but it is just around the corner .
It will be interesting to see if in the upcoming decision the Bank of Israel will begin to hint to us that it is going to look “beyond” the ongoing increase in housing inflation, when at the same time we expect them to also emphasize the moderation in product inflation – as Powell has been doing in recent weeks. On the other hand, the governor will surely emphasize that inflation in the service industries in Israel continues to be too high.
Meanwhile in the world, the central banks did not really like the expansion of financial conditions of the last few weeks (in simple words, they did not like the increases in the markets…) and all the central banks in the last day came to work and sent us very hawkish messages.
It started with Chairman Hepard last week, who tried to signal to the markets that they would continue to raise interest rates, but the markets were less convinced since interest rate pricing did not really change following the decision. On Thursday morning, the European central banks raised interest rates – , , Denmark, and of course the
The title of the most hawkish central bank was today won by the ECB led by Lagarde, who delivered the most hawkish messages the ECB has delivered so far. And she did it when it was already clear that Europe was sinking into a deep economic recession. Lagarde signaled to the markets that they intend to raise the interest rate beyond what is currently implied in the markets and that the inflationary risks in Europe continue to be very high. As a result of Lagarde’s words, bond yields in Europe soared today, and the declines in the markets deepened.
In our estimation, the economic data in Europe and the US are expected to weaken significantly during the coming months, and together with increased volatility in the markets and a natural decrease (due to the fading of edge effects) in the annual inflation rate in these regions, the conditions will be established to stop the trend of interest rate increases in the world already in the first quarter of the year.
Against the background of the central banks’ great hawkishness in the last day, and against the background of November’s inflation data, it is likely that the Bank of Israel will choose to raise the rate by another 50 bp in two and a half weeks (01.02.2023). However, in light of the highest level of uncertainty in the world, together With the fact that the monetary policy in Israel will already be relatively restrained, it is possible that the Bank of Israel will choose to stop the process of raising interest rates afterwards.
The author is the chief economist of the Psagot Investment House and has no personal interest in the subject of the review. This review is not intended to be a substitute for investment marketing that takes into account the data and the special needs of each person.