Inflation in Israel works its way down as interest rate cut looms

Amid global economic shifts, Israel's financial landscape is undergoing a balancing act.

With a potential interest rate cut on the horizon and the shekel's strengthening, the nation faces both challenges and opportunities. The recent conflict has cast a shadow on business and consumer sentiments, while international trends, especially in the US, add an extra layer of complexity.

Is inflation on the mend?

In Israel, inflation seems to be on a gradual decline. According to Bank Leumi’s chief economist Dr. Gil Michael Bafman and Dodi Reznik, interest rate strategist at Leumi Capital Markets, there's a chance we might see an interest rate cut in January if the Israeli shekel keeps getting stronger and the country's financial risk drops significantly.

It is important to note, however, that the recent conflict has taken a toll on both the Business Trends Assessment Survey and the Consumer Confidence Index — two important economy measurement tools — painting a mixed picture of the nation's economic sentiment

The slowdown in Israel's economy in October is showing up in less import and export action, reflecting the broader impact of recent geopolitical events. The analysts are cautiously optimistic, hinting that if things continue on a positive note, we might see that interest rate cut early next year.

Israel's economy is facing a bit of turbulence, both at home and abroad. While challenges are there, there's hope that careful financial moves and smart investments could set the stage for a strong economic comeback in the months to come.

Setting the stage for a strong economic comeback

In anticipation of the Bank of Israel's interest rate decision on November 27, analysts expect the current rate of 4.75% to remain unchanged. The recent 0.5% rise in the October Consumer Price Index (CPI) resulted in a dip in annual inflation from 3.8% to 3.7%, prompting a cautious approach.

Ronen Menachem, Chief Markets Analyst at Mizrahi Tefahot, suggested that the Bank of Israel is likely to wait for upcoming economic indices before making any adjustments, emphasizing the importance of monitoring the shekel's movement and inflation trends. A consensus among analysts is leaning towards a potential rate cut in January to stimulate the economy following recent conflicts.

Nira Shamir, Chief Economist at Israel Discount Bank, cited a 100% likelihood in the contracts market of a 0.25% rate cut within the next three months, possibly followed by an additional 0.25% cut by April 2024. “The October CPI combined with the impressive strengthening of the shekel recently, raises the chances of a Bank of Israel rate cut, if not in the next decision, then on January 1, 2024,” she added.

The decision will be influenced by forthcoming data on the job market, job vacancies, the manpower survey, and the state of the economy integrated index, alongside market trends, with a particular focus on the foreign currency market.

Yonatan Katz, Chief Economist at Leader Capital Markets, believes that a rate cut is certainly inevitable. “In our basic scenario, the Bank of Israel will begin to cut the interest rate at the start of 2024,” he said, noting that an earlier cut — even as soon as the end of November — is probable if the shekel continues to appreciate.