BoI's Rate Decision Interpreted As Sign Of Caution

The Bank of Israel refrained from cutting its base rate on Monday, defying the consensus call for a 25bp reduction, pencilled in by 11/18 economists polled by Bloomberg. The central bank outlined a cautious stance, despite continued easing bias, with further cuts in the pipeline pending the dissipation of uncertainty around the impact of the war in Gaza on inflation processes.

• Goldman Sachs note that the decision was surprising, given benign inflation data, a soft 4Q23 GDP print and relative shekel strength. They write that the BoI's reaction function clearly remains more cautious against the backdrop of elevated uncertainty and expect gradual cuts to recommence at the next MPC meeting, with near-term risks skewed in the hawkish direction.
• HSBC find two key upside risks to the inflation outlook in the BoI statement: higher construction costs and the need for additional housing for evacuees. They revise their rate forecast and now expect the BoI to cut rates at the pace of 25bp/quarter, bringing the key rate to 3.75% at end-2024 and to 2.75% at end-2025.
  
• JP Morgan said that the BoI delivered a hawkish surprise, but ultimately it's more about the speed and not the end-point, and they still expect a terminal rate of 3.75% at end-2024. They do not see obvious macro or market obstacles against further easing in the near term, but now expect a less front-loaded policy path, i.e. a cut every other meeting.