A series of security incidents in recent weeks and some undermining of coalition stability have been among the standout news of the past week. On the other hand, we see that the improvement in the labor market continues, and in the first half of March, the unemployment rate fell to 3.2%, full employment for all intents and purposes. The number of Israelis who left the country by air in March returned to the level of 2019, which means that corona restrictions were less of a deterrent to passengers. The opening of the sky is expected to be reflected in a slowdown in local consumption in the coming months. The jump in tax revenues continued and the rate of budget deficit from GDP fell to only 1.4% in the 12 months ended March. The impact of security incidents on the economy is usually very temporary and almost imperceptible in the data. On the other hand, a coalition that finds it difficult to pass reforms or the state budget for next year has a price over time. The rating company Moody’s has improved the rating outlook of the State of Israel for the better, against the background of the sharp improvement in the fiscal situation of the economy. The Moods’ ranking is one point lower than that of P&S.
March was the second consecutive month in which the Bank of Israel refrained from purchasing foreign currency. In fact, during the first quarter of the year, the Bank of Israel purchased only $ 356 million (during January alone). On average, over $ 2 billion a month, against which the Bank of Israel’s foreign exchange reserves fell by nearly $ 7 billion during the first quarter of the year.
Return to full employment – The unemployment rate fell in the first half of the month to a level of 3.2%, with an increase in the number of employed, and a decrease in those still defined in the labor market due to Corona. In the business sector, the average wage has risen by a high annual average of 5.6% in the last two years. The rise in wages in the business sector is expected to maintain high-level inflation, which is close to the upper limit of the inflation target, in the coming year.
The Ministry of Finance has decided to reduce the price of fuel by half a shekel per liter, through a temporary reduction in excise duty on fuel. The reduction is for a period of three months and requires the approval of the Finance Committee. The average price of fuel in April is expected to rise by 2% and in May to fall by 8%. Other countries, especially in Europe, have taken a similar step in reducing fuel taxation – a move that helps curb inflation slightly in the short term. We reduce the inflation forecast for these months to 0.8% and 0.4% respectively. The inflation forecast for the coming year remains unchanged at 3.1%.
Towards an increase in interest rates tomorrow – the chances are that the increase will be 0.15 percentage points to 0.25%. There is a certain chance of an increase of 0.4% to a level of 0.5%. The annual inflation rate is expected to reach a level of 4% within two months, and it can be seen that the price increases are becoming horizontal, and are not just focused on fuel prices. Central banks now fear “sticky” inflation, that is, one that affects expectations and feeds itself, and in a negative real interest rate environment, the chances of this increase. The markets embody a fairly fast interest rate hike to a level of about 2.0% in about a year. We tend to estimate that the rise in interest rates will be slightly more moderate. These interest rate hikes are already reflected in the markets, so we do not believe that they will affect the foreign exchange market, especially since the interest rate differential with the United States is expected to continue to grow, and this is also holding back the appreciation pressures. In terms of the real economy, the timing is convenient, the economy has returned to full employment, and the real estate market is characterized by high demand.