Slowing inflationary pressures likely to support monetary loosening

ISRAEL - In Brief 01 Dec 2024 by Jonathan Katz

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Geopolitics: Finally, some good news. The ceasefire with Hezbollah seems to be holding, despite some Israeli attacks due to Hezbollah violations. It is still difficult to assess the likelihood of calm being maintained, but we think so, as the war in Syria will take precedence for Hezbollah and Iran. The renewed initiative for an agreement in Gaza is shaping up, but the Israeli government’s right-wing parties are likely to oppose releasing Hamas prisoners. On the other hand, Trump will push forward on ending this war. If the ceasefire holds in the North, inflation will moderate We have already seen a 2.8% appreciation of the shekel (against the basket) in the past two weeks. Several foreign carriers have announced renewed flights to Israel in the near future, which will reduce airfares significantly. In the medium term (probably within six months) the government will reduce monetary support for the evacuees and push them to return to their homes (after repairs). The number of mobilized soldiers will also be reduced. Less domestic fiscal spending is deflationary. We have revised our inflation forecast to 2.5% assuming present shekel levels for the coming year (a conservative assumption). Signs of weakening activity. The BoI composite index (-0.1% in October) has been trending lower since June. Credit card purchase reflect no growth as well in recent months. Policy rates likely to come down in Q225 Weaker inflationary pressure and a strong shekel will support monetary loosening. Granted, inflation y/y will remain elevated in the 1st half of the 2025, but this is mostly due to base effects and the sharp contribution of government price adjustments in early 2025 (we estimat...