After sharp market fluctuations: The new forecast for interest rates and your pocket

According to the review conducted by Rafi Gozlan, chief economist at IBI Investment House, the latest macro data in the US, while not providing an unequivocal picture regarding the interest rate decision in September, relatively reduces the probability of an imminent interest rate hike.

However, the Fed's reaction function is far from clear and the disagreements among the members are quite significant, so that if the next inflation data are stronger and in particular if energy prices continue to move at current levels, the risk of an interest rate hike in September-October will become quite high. Nevertheless, we reiterate the assessment that without a renewed acceleration in wages, the interest rate hike in the US is limited to 1-2 hikes of 25 bps.

In Israel, the Consumer Price Index for July rose by 0.3% in accordance with preliminary estimates. The index excluding energy, fruits and vegetables, an estimate for core inflation, rose by about 0.5%, but the annual rate remained identical to June, 1.5%. Since the beginning of the second quarter, core inflation has established itself at a level below the center of the target range of about 1.5%, with the general index converging to core inflation in recent months.

"Looking ahead, we estimate that the downward trend in inflation is nearing exhaustion. The moderation during the last months to below the center of the target range was partly due to temporary factors, primarily the strengthening of the shekel, so that the gradual dissipation of this effect against the background of an economy characterized by a tight labor market with excess demand, is expected to lead to an increase in the inflation environment later in the year. We expect an increase of 2.2% in the coming year, with a certain upward risk to the forecast stemming from necessary budget adjustments that the next government will carry out, some of which may be implemented through tax increases," the economist noted.

Assuming there is no rapid turnaround in the direction of shekel depreciation in the coming weeks, we assign a high probability to an interest rate cut of 25 bps to 3.25% in the upcoming decision at the beginning of September. According to the expert, considering that the local macro picture supports an increase in the inflation environment, especially with the dissipation of the shekel appreciation effect, while most leading markets in the world are pricing in an interest rate hike in the coming year, economists estimate that the local interest rate adjustment process is nearing exhaustion after this expected cut.