| Ofer Klein, Head of the Economics and Research Division at Harel Insurance and Finance
| In Israel: Half green light
As we have written before, we do not rule out the possibility that the Bank of Israel will also choose to increase by 0.5 percentage points in the next announcement.
The summaries of the discussions from the recent interest rate decision of the Bank of Israel showed that all members of the Monetary Committee supported the decision to raise the interest rate by 0.4 percentage points in light of the increase, continued global interest rate increases and positive indicators from the labor market.
In our opinion, these factors, which continue to stand out in the data for May, also support the continuation of the hawkish line in the next interest rate decision on July 4.
In light of the data and recent surprises in its policy, we do not rule out that the Bank of Israel will choose to raise the interest rate by 0.5 percentage points in the next announcement, even at the price of a certain strengthening in shekels.
There are increasing signs in Israel (and around the world) that consumers’ preferences for consuming products at the expense of services are coming to an end. The revenue index in the marketing chains for April is still at high levels, but the growth rate has slowed significantly this year compared to the previous two years, especially in food consumption.
On the other hand, we are witnessing an increase in the consumption of services, but not uniformly with a rapid increase in the consumption of tourism services, which is also reflected in rising prices.
| Europe – The end of the negative interest rate era is near
We expect the ECB to announce the end of the acquisition program this week, signal its intention to raise its decision in July, and not rule out a half-percentage point move either.
The eurozone does not stop and stood at 8.1 percent in May (according to the initial estimate) about half of that due to the continued surge in energy prices (gas, fuel and electricity), which rose more in Europe in light of the war in Ukraine.
High inflation and forecasts for a continued rise in the next two months in light of the union’s decision to stop importing oil from Russia (by sea only) confirm the estimates that the central bank will end the negative interest rate period later this year.
This coming Thursday we expect the ECB to announce a termination, signal its intention to raise interest rates in its next July decision, and also not rule out a half-percentage point move.
The increase in signs of a slowdown in growth will not stop the bank in the next six months either, but it will make it difficult next year. In our view, this supports a continued rise in yields in Europe and the strengthening of the euro, especially against the dollar, which we believe already embodies a reasonable interest rate hike.
| USA: Waiting for half but afraid of the forecast
Next Wednesday we expect in the US another increase of about half a percentage point but most of the attention will be on the updated forecasts.
U.S. labor market data continues to be positive with 390,000 added in May, better than expected but this is the lowest growth in about a year.
The average has continued to rise but at a slightly slower pace of 5.2 per cent in the last 12 months, largely thanks to the decline in the rate of wage increases in the tourism, hospitality and retail industries which have also led to the sharp increase in the number of jobs since the beginning of the year.
Corporate sentiment moderated but remained positive, according to the purchasing managers’ indices for April, which stood at about 56 points. Therefore, in our opinion, the growing discourse on a recession this year is excessive, in light of the strong labor market data and current indicators.
The data support the continued slow moderation of inflation in the coming months.
Next Wednesday we expect in the US another interest rate increase of about half a percentage point but most of the attention will be on the updated forecasts.
We expect a downward update of growth forecasts but upwards to the inflation forecast and interest rate at the end of the year towards 2.5 percent.
| To influence the market you have to surprise it!
This morning, a bit like the Bank of Israel, the Australian central bank chose to surprise the market for the second time in a row and raise more than the preliminary estimates, this time by half a percentage point to 0.85 percent.
The strong labor market alongside the high inflation (which will accelerate further) contributed to the decision. In doing so, the bank needs more central banks around the world that have accelerated interest rate hikes in recent weeks and signal that they want to reach high interest rates quickly this year, thereby moderating long-term inflation expectations.
In our estimation, in the near future we will see more central banks operating in this way.
The author is the head of the Economics and Research Division at Harel Insurance and Finance. The author (s) and / or members of the Harel Group and / or interested parties in them and / or the controlling shareholders of the Group, may hold and / or trade, for themselves and / or for others, the securities and financial assets specified in this review. This review should not be construed as investment marketing or an alternative to investment marketing, which takes into account the personal and special needs of each investor. What is stated in this review reflects the opinion of the author at the time of publication, and this may change at any time and without further notice. The Company will not be liable, in any form, for any damage and / or loss caused, if any, as a result of relying on this review, nor does it warrant that relying on the information contained therein may yield profits.