Interest rate decision in Israel: Will the governor surprise the market?

Ofer Klein, Head of Economics and Research at Harel Insurance and Finance, presented his weekly economic review. The focus is on the US Federal Reserve Chair's upcoming speech, the interest rate decision in Israel, the US bond market volatility, trade disputes between the US and Canada, and economic indicators in the Eurozone, the UK, and Japan.

"On Friday, Kevin Warsh will deliver a speech at the Jackson Hole conference. He is likely to focus on productivity, artificial intelligence, and the Fed's balance sheet, avoiding clear guidance on the September rate decision. However, given the bond market volatility, even a lack of clarity will not be perceived as neutral.

The US Treasury's expansion of long-term bond buybacks provided only temporary relief, as long-term yields have risen again. Markets are waiting to understand how the Fed interprets this rise and the role of fiscal policy in the current environment.

In Israel, the interest rate decision is expected on September 1st. Markets are pricing in a cut with a probability of nearly 50%. However, given two previous cuts, a tight labor market, and global trends, we believe the rate may remain unchanged. This is also due to positive growth and geopolitical risks. Nevertheless, the high real interest rate and the strength of the shekel support a return to rate cuts in the final quarter of the year.

The US Treasury announced it would double the maximum size of long-term bond buybacks (from $2 billion to $4 billion) starting in September. While this is a small fraction of the $40 trillion debt, it signals attention to rising yields without solving structural deficit issues.

The Fed's July meeting minutes revealed a hawkish committee, though subsequent employment and inflation data have been more moderate.

Trade disputes between the US and Canada over tariffs on steel, aluminum, and agriculture are questioning the stability of trade relations. In Canada, this may accelerate a rate cut, while in the US, tariffs could limit the Fed's room for policy easing.

In the Eurozone, business sentiment remains positive with a Purchasing Managers' Index of 52.1. If inflation continues to rise, it will pave the way for an ECB rate hike on September 10th.

In the UK, inflation rose to 2.9% in July, but a weak labor market is curbing expectations for a rate hike. In Japan, inflation reached 1.9%, and the depreciation of the yen is bringing the country closer to a rate hike in the near future."