The Bank of Israel remains on standby. The wave of morbidity, relatively low inflation in Israel and the strength of the shekel allow the Bank of Israel to be patient.
Omicron contributed to a decrease in the total number of credit card purchases in December, with an emphasis on the domestic tourism and restaurant industries.
The unemployment rate rose slightly in December, but labor market data have improved in recent months.
Israel’s exports of services continue to expand and the sharp increase in investments in 2021 will lead in our estimation to the continued expansion of exports this year as well. The surplus in the current account of the balance of payments leading the export of high-tech services was one of the main contributors to the strengthening of the shekel. We still expect the appreciation to continue this year, but in our estimation the opening of a gap between the US interest rate and the Israeli interest rate is expected to offset (in part) the constant pressure of the structural factors to strengthen the shekel.
Bottleneck relief and falling prices contributed to an improvement in China’s Purchasing Managers’ Index for manufacturing at the end of 2021, despite a number of outbreaks in the country that led to spot closures.
Inflation within the target range and the strength of the shekel allow the Bank of Israel to continue to be patient
As expected, the Bank of Israel left the interest rate unchanged and noted that monetary policy is expected to remain extended for a long time in light of the challenges that still exist for economic activity, including the morbidity situation.
An initial manifestation of the effect of the current wave of illness can be found in December, when there was a decrease in the total number of credit card purchases, especially in the tourism and restaurant industries.
At the same time, the Bank completed the various expansion plans (published in the previous announcement) in light of the improvement in the economic recovery, with an emphasis on the labor market. Although the December first half of the labor force survey showed a slight increase in the unemployment rate to 6.3 percent (6.1% in the second half of November), the situation is still much better compared to the end of the third closure.
The completion of the acquisition program will contribute to an increase in volatility, and strengthens our assessment that we will continue to see an increase in bond yields, which will also be affected by a parallel increase in the world in light of the continued process of raising interest rates in many US-led central banks. At the same time, unlike other central banks, we do not believe that we will see an increase in interest rates in Israel before the last quarter of 2022, due to the relatively low inflation in Israel compared to most OECD countries, as the Governor of the Bank of Israel emphasized in his speech.
This is also reflected in the updated forecasts of the Bank’s Research Division, which expects inflation to be 1.6 percent by the end of 2022 and 2 percent by the end of 2023.
At the same time, the Bank slightly downgraded its growth estimate for 2021 to 6.5 percent (7% in the previous forecast), but left the forecast for 2022 unchanged at 5.5 percent (still higher than our estimate to 4.8%). The Bank first published a growth forecast of 5 percent in 2023 (here, too, the forecast is higher than our estimate of 4%).
Exports of services continue to support the shekel, but the opening of interest rate differentials abroad reduces the pressure to appreciate
Israel’s exports of services continue to rise with an increase of 8 percent in October (according to seasonally adjusted data) and 40 percent compared to October last year. The sharp increase in investments in the high-tech industry in 2021 will lead to a continued expansion of exports in the coming years as well. This supports the expansion of the surplus in the services account and the strength of the shekel.
In 2021, the shekel was among the strongest currencies in the world, with an appreciation of about 8 percent against the basket of currencies (3% against the dollar and 11% against the euro). The surplus in the current account of the balance of payments leading the export of high-tech services alongside the rises in world stock markets contributed to this, despite a record high of over $ 35 billion in Bank of Israel foreign exchange purchases. H. will increase in light of the termination of the acquisition program and an expected decrease in the scope of the Bank of Israel’s intervention. At the same time, opening a gap between the US interest rate and the Israeli interest rate is expected to offset (in part) the constant pressure of the structural factors to strengthen the shekel.
After the holidays (abroad) the data return
In the last two weeks, the economic publications from abroad have been sparse in light of the Christmas / Rosh Hashanah holiday. In the United States, the summaries of the latest interest rate decision will be published on Wednesday, and the last employment report for 2021 will be published on Friday. Preliminary indicators point to a continued improvement in the labor market (still ahead of the Omicron), which supports US Federal Reserve interest rate hikes this year and continued yields to rise.
In the euro area, the price indices for the producer will be published on Thursday and the estimate for inflation on Friday. The numbers will continue to show that in Europe the “price power” of companies is particularly low compared to the US and they are having a hard time rolling down the costs on consumers.
China’s Purchasing Managers’ Index surprised positively when it rose more than expected to 50.9 points in December. Improvement in demand along with continued easing of disruptions and bottlenecks have contributed to this, a figure that indicates that in the meantime the industry is dealing with corona outbreaks in various parts of the country. At the same time, the price pressures are also moderating in light of the government’s actions to improve supply and lower the prices of raw materials, which for the first time in about a year and a half has allowed companies to reduce prices slightly. The big question is whether this positive trend will continue when the omicron reaches the shores of China. On Thursday, the Purchasing Managers’ Index for the Services Industries will show whether the expansionary monetary policy has contributed to the improvement in sentiment in light of concerns from the Omicron and continued closures.
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