Discount Bank: Inflation and Rising Airfares Hinder Interest Rate Cuts
Economists at Discount Bank point to rising consumer prices and fuel costs driven by geopolitical tensions and a weaker shekel. These developments effectively rule out any near-term interest rate cuts in Israel.
Einat Meir, Director of the Economic Department at Discount Bank, has conducted a weekly macro review of the global economy and the current situation in Israel.
USA: New Tariffs and Industrial Stagnation
The Trump administration has announced new tariffs of 10%-12.5% on approximately 60 countries, following a February court ruling that deemed 2025 retaliatory tariffs illegal. The weighted tariff rate is expected to remain at 7%. This follows recent 50% tariffs on Canadian imports and 25% on Brazilian imports.
While the administration claims an industrial boom, growth is concentrated in advanced industries driven by AI demand. In other sectors, stagnation persists, and industrial employment has declined since the start of Trump's second term. Consequently, tariffs have not proven effective in restoring broad industrial production.
The Fed is expected to hold interest rates steady this week, prioritizing inflation control despite June's moderation. Markets are pricing in a 37% chance of a hike, up from 15% last week. The Fed Chair maintains a hawkish stance, citing a stable labor market and the need to address inflation, which has deviated from targets for five years.
Eurozone and Israel
The ECB kept rates at 2.25%, with forecasts for two additional hikes remaining in effect. However, the bank may refrain from further tightening if US-Iran tensions ease and oil prices fall.
In Israel, the composite index of economic activity rose by 0.6% in June, reflecting a recovery from the impact of Operation 'Iron Swords' and 11% growth in the second quarter. The labor market remains tight, with unemployment at 2.9% and a participation rate of 61.9%. The vacancy-to-unemployed ratio rose to 1.1, supporting continued wage growth.
Bond and Commodity Markets
Rising oil prices have pushed interest rate expectations in the US to 4.2% by June 2027. In Israel, inflation expectations for the coming year have climbed to 1.7% due to the weakening shekel and higher energy costs. Discount Bank projects inflation will reach 2% within a year, driven by airfare, fuel, and other costs.
Oil prices, which hit $100 per barrel amid the Strait of Hormuz blockade, corrected to $90 following signals from President Trump regarding de-escalation. However, global inventories remain significantly lower than pre-war levels, leaving the oil market highly vulnerable to supply disruptions.
Currency Market
The dollar strengthened by 0.7% globally, supported by Fed rate expectations. The shekel weakened by 0.4%. The correlation between the shekel and the Nasdaq, which has weakened since June due to institutional interest in foreign assets, is viewed by Discount Bank as a temporary correction.
