Bank of Israel Expected to Hold Interest Rates Amid Post-Election Uncertainty

Psagot Investment House estimates that the Bank of Israel may decide to keep interest rates unchanged at its upcoming meeting, opting to wait for greater clarity on the economic and fiscal landscape following the upcoming elections. This cautious stance comes despite recent data pointing to a moderation in wage growth and a reduction in concerns over potential inflationary pressures stemming from the labor market.

Wage Moderation vs. Economic Recovery

Recent wage figures signal a clear shift in momentum. The seasonally adjusted average wage in the economy decreased by 0.3% in the most recent measured month, marking five consecutive months of declines. Furthermore, the annual growth rate moderated to 3.4%, a sharp drop compared to 6.5% and 6.4% in the preceding two months. According to Psagot, this slowdown helps alleviate fears of wage-driven inflationary surprises, potentially granting the central bank greater policy flexibility.

At the same time, economic indicators reveal a nascent recovery in overall business activity. Job growth has been primarily concentrated in lower-wage sectors, including hospitality and food services, retail trade, arts and entertainment, and agriculture. Concurrently, the consumer confidence index rose by three points to minus 17 points, while corporate sentiment surveys indicated broad-based improvements across most industries.

Strong Consumption Trends

Signs of rebounding activity are also evident in household consumption data. The annual growth rate of total credit card purchases accelerated to 5.4% during the June-August period, following a noticeable slowdown in earlier months. This improvement was largely driven by increased spending on services, such as insurance, airline tickets, and leisure activities. Data released by the Bank of Israel shows that total weekly purchases reached a peak of approximately 2.12 billion shekels at the end of September.

"The combination of moderating wage dynamics and recovering economic activity allows the central bank the luxury of patience before enacting further rate cuts," analysts at Psagot noted.

Fiscal Uncertainty and Policy Outlook

Compounding this patient approach is the prevailing uncertainty surrounding fiscal policy in the post-election period. Consequently, even with encouraging inflation-related data, market expectations lean toward the central bank maintaining the status quo on interest rates while closely monitoring broader economic developments.