Bank Of Israel Seen Pausing Rate Hikes But Shekel Weakness Complicates Matters

The shekel has weakened a tad ahead of the Bank of Israel's monetary policy decision scheduled for 1400BST. A dozen out of 16 economists in a Bloomberg poll expect the central bank to pause the tightening cycle, which would be the first on-hold decision in more than a year. The BoI's deliberations have been complicated by the shekel's sharp depreciation over the past few months, which came on the back of a rising political risk premium stemming from the government's judicial overhaul plan. Last month, BoI Deputy Governor Andrew Abir said that "we've probably had to do more monetary policy tightening than we had envisaged because of the political uncertainty," which weighed on the shekel and exacerbated inflation. While headline inflation eased to +4.6% Y/Y in May, undershooting the +5.0% consensus forecast, it remains comfortably above the +1%-3% Y/Y target range.

• Bank of America expect the BoI to pause due to downward surprise in inflation data and slowing economy. They think that the BoI will want to see the effect of its policies.
• Citibank expect unchanged rates today. They say that despite easing price pressures, they still think early 2024 will be the first opportunity for rate cuts.
• Goldman Sachs expect the BoI to leave rates unchanged, but see risks that the shekel weakness following a deterioration in domestic political developments and hawkish broader market repricing could push the BoI to deliver a hike as well. The BoI could look to deliver an additional 25bp rate hike, but hawkish surprises by the BoI in recent meetings had relatively limited impact in subverting the FX depreciation pressures. Moreover, as the BoI will be publishing updated projections, it could use these to deliver more hawkish guidance, by pushing back the timing of rate cuts instead of hiking rates. However, with inflation data beyond this meeting on track to develop on a downward path, Goldman do not think that domestic economic conditions will call for further tightening by the Bank.
• HSBC expect upcoming BoI decision to be close. They believe that inflation will moderate, given well-anchored inflation expectations and the tightening delivered to date. Their base-case assumption is that rates will remain unchanged until the end of the year, with risks tilted in the direction of a final 25bp hike in Q3.