October looks as if it will be challenging for the Israeli economy

October will be an eventful month for the Israeli economy. Not that things have been relaxed in the past year, but a series of exceptional and important events will cluster together next month that will attract the attention of investors in Israel and beyond and will affect the stability of the economy in both the short and long terms.

October 8-15 – A second term for the Governor of the Bank of Israel?

With his five-year term due to end in December, Governor of the Bank of Israel Amir Yaron has committed to announcing his decision on whether or not he will seek a further term after the Sukkot holiday, which ends on October 7. The decision will of course depend on the signals Yaron receives from Prime Minister Benjamin Netanyahu (the governor of the Bank of Israel is appointed by the state president on the recommendation of the government).

The identity of the central bank governor is important. In the past few months, several market players and others have remarked that the uncertainty over who will be the next governor has added to the anxieties of investors.

“There is no doubt that the market very much wants continuity and likes the governor’s stance on the need for compromise in the dispute over the judicial overhaul,” says United Mizrahi Tefahot Bank chief markets economist Ronen Menachem. “A possible scenario of an interest rate hike and a lack of continuity in the stance of the governor on the part of the next incumbent will be a considerable challenge for the local market,” he adds.

Another senior economist told “Globes” that if the governor receives a nod from the government for a second term, the market will view this positively: “Such a development will reduce the level of uncertainty and will show that senior government ministers are thinking rationally,” he said. On the other hand, in the event that Yaron does not continue in the post, he believes that uncertainty will grow.

October 13 – Moody’s report

In October, international credit rating agency Moody’s will publish its up-to-date sovereign rating for Israel. Moody’s not long ago expressed dismay at the lack of political certainty in Israel, which raises the fear that it will downgrade the rating from its current level of A1.

Besides the political situation, state revenues have been in decline over the past few months, which will weigh on the rating decision, while the fiscal surplus recorded at the end of 2022 has run out. In its last report, in April, Moody’s made favorable mention of Israel’s restrained fiscal policy and its responsible budget, but since then the fiscal deficit has grown, and tax revenues are lower than expected. A senior economist told Globes that he believed that the agency would not downgrade Israel’s rating, but that there was “a real fear” of a downgrade of the rating outlook to “Negative.”

Menachem of United Mizrahi Tefahot adds, “All the rating reports published so far point to the need to reach broad consensus on decisions concerning the legal system, and to the economic damage that is liable to ensue if that doesn’t happen. Nevertheless, the rating has not fallen. If there is a different result this time, that will probably directly affect shekel exchange rates.”

October 15 – The Knesset returns from recess

The winter session of the Knesset is due to begin on October 15, which is liable to increase further the uncertainty and chaos on the political front. To the question of the progress of the judicial overhaul in the legislature will be added a no less stormy debate on the law exempting ultra-Orthodox yeshiva students from being drafted into the IDF. That will certainly not lower the flames, and will not calm investors. At present, it seems that even the prospect of normalization with Saudi Arabia is not managing to cheer Israelis or create any common ground in the Knesset.

The local elections at the end of October may well also raise the decibel level among politicians, and add to the tension among investors, who only seek quiet.

October 15 – September CPI reading

Inflation in August was unexpectedly high, bringing the 12-month inflation rate to 4.1%. Before the Israeli Consumer Price Index reading was released, it was reported in the US that the inflation rate there had climbed to 3.7%, higher than forecast, fueling fears that there too high-interest rates were failing to quell inflation at the hoped-for speed.

The September CPI reading will be critical because it is supposed to show inflation once more receding and falling below 4%. According to Bank of Israel forecasts, inflation for the 12 months to the end of September should be 3.9%, and trending towards the target range of 1-3%, expected to be reached by February next year, when inflation is forecast to be running at 2.8% annually. If the September CPI reading too, is an unpleasant surprise the forecasts for the taming of inflation will be liable to change.

October 16 – Supreme Court president retires

The term of President of the Supreme Court Esther Hayut ends on October 16. For the first time ever, an acting president is expected to be appointed: Justice Uzi Vogelman, because of the lack of agreement with Minister of Justice Yariv Levin over the convening of the Judicial Appointments Committee.

A few days beforehand, on October 12, Justice Anat Baron will also retire from the Supreme Court. On October 22, the Supreme Court, sitting as the High Court of Justice, will hear petitions calling for the convening of the Judicial Appointments Committee, despite Levin’s objections, because of the severe shortage of judges at every level.

It is clear that this is not just a legal issue. In the past year, it has emerged that Israel’s economic strength is connected to the independence of its courts and that further upsets in the legal system will not help to calm things down.

October 23 – Another interest rate hike?

The Bank of Israel is due to announce an interest rate decision on October 23. According to market estimates, the bank’s interest rate will rise by 0.25% to 5%, after being left unchanged at 4.75% in the last two decisions. The inflation figures reported in the middle of the month will give an important indication of what will happen with the interest rate. Worse-than-expected figures will make an interest rate hike more likely, and further weigh on market sentiment.

According to Menachem, the forthcoming interest rate decision is important for two main reasons: “First of all, because in its previous announcement, the Bank of Israel made clear that a further rise is on the agenda. Secondly, the decision will be accompanied by a new economic forecast.”

Besides inflation, the shekel-US dollar rate will also impact the interest rate decision. The shekel has weakened against the dollar by more than 8% so far this year, and according to market players, the excess depreciation resulting from the uncertainty on the market amounts to 15% of the current rate (NIS 3.81/$). That is to say, the depreciation stemming from non-economic causes is about NIS 0.50. Their impact can also be seen in the foreign currency exposure of Israeli financial institutions, which have bought over $5 billion since the beginning of the year, adding to the weakness of the shekel.

Looking overseas, energy prices are also a concern. The price of a barrel of Brent crude oil approached $100 last week, which raises the possibility that commodity prices will climb because of importers’ higher shipping costs. This will reignite inflation in an item that has moderated substantially in the past year.

“A rise in commodity prices is very worrying,” a senior market source said. “Further rises in oil prices could make it difficult to bring down inflation in Israel and around the world, and could certainly affect the Israeli economy.”