The BoI appears more concerned about excess demand on inflation

ISRAEL - In Brief 12 Jan 2025 by Jonathan Katz

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Geopolitics: The Northern border remains calm with the cease-fire holding. The Israeli air force with the US/GB attacked military and infrastructure in Yemen. Some drones from Yemen were shot down last week but no sirens went off. Low-level hostilities continue in Gaza. The Israeli negotiating team has returned to Qatar in order to negotiate a cease-fire in Gaza. There is renewed optimism that this time a deal is more likely due to pressure from Trump. This expectation supported the Israel bond market this Sunday. The MPC/Governor released a fairly hawkish statement last week: Although the BoI rate forecast (1 to 2 cuts by end-year) did not surprise us, the accompanying statement and press conference had a hawkish tone. § The MPC is concerned about “excess demand” following the war from extra savings from mobilized soldiers and evacuees, and in general a post-war relief demand boom. The BoI expects private consumption to growth by 7.5% this year, a rather rapid pace (we expect 3.2%) considering fiscal measures eroding real purchasing power. § The decline in supply constraints and a more restrictive fiscal policy were mentioned as well but less emphasized. § Our take: The MPC will wait longer to see that inflation decelerates following the government-initiated price effects in Q125. We currently expect the first cut at the end of May, with three cuts this year. Regarding a post-war relief consumption uptick, consumer confidence in December increased only very slightly to -28 from -30, while the expectations for household’s economic situation in the coming year worsened to a record low, most likely due to fiscal adjustments. This is not too supportive of a consumption bo...