Inflation pressures likely to subside in 2025, supporting rate cuts

ISRAEL - In Brief 17 Nov 2024 by Jonathan Katz

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Geopolitics: A ceasefire in North still appears likely, but may have to wait for Trump. The ground operation on both fronts is winding down, although missiles and drones continue to land in the extended North of Israel resulting in some damage and casualties. The imminent threat from a ballistic missile attack by Iran appears to have declined. October’s CPI in line with expectations Inflation in October remained stable at 3.5% y/y while core inflation pushed higher to 3.3% due to spiking airfares. Although inflation in early 2025 is set to accelerates on fiscal adjustments and base effects, inflation in 2025 is expected to moderate to 2.7% or less on a tighter fiscal policy, some slack in the labor market and less supply constraints. The fiscal deficit slowed to 7.9% LTM from 8.5% This is due to the base effect of a spiking deficit in Oct 23 as the war commenced. Tax revenues in October were robust, but we are likely to see some softness in Q424 due to the recent escalation. We expect a fiscal deficit of 7.5% GDP this year. GDP growth in Q324 reaches 3.8% Saar This is compared to consensus call of 2.4% (we were expecting 3.9%). GDP growth was impacted by rapid expansion in investments, private consumption, and industrial exports. Trade data in October is encouraging with expansion of both exports and imports. The bond market: 10-year yield spreads vis-à-vis the US have declined recently to close to 40 basis points on optimism regarding a possible ceasefire in the North, government fiscal approval and possibly optimism regarding the implications of a Trump victory on Israel. This positive trend could continue if an actual ceasefire is reached and fiscal budget approved ...