Investment house warns: Interest rate in Israel will not drop soon
The expected rise in fuel prices, labor shortages, and global economic pressures are shifting forecasts. Leader Capital Markets explains why an interest rate cut in Israel remains unlikely in the near term.
The Bank of Israel is expected to continue its wait-and-see policy and not rush to lower the interest rate, according to a macro review published by the investment house Leader Capital Markets. The assessment suggests the interest rate will remain at 3.25%, mainly due to geopolitical uncertainty and persistent inflationary pressures, with the market even pricing in the possibility of a further increase to 3.5%.
Leader notes that the depreciation of the shekel recorded in recent months, alongside rising energy prices, is expected to accelerate inflation in the short term. A notable development is the forecast for an approximately 8% increase in fuel prices as early as the beginning of August, which may impact transportation costs and the prices of other goods.
However, the investment house emphasizes that in the longer term, there are factors that may curb inflation. Despite the recent weakening of the shekel, it has still strengthened significantly in annual terms against the basket of currencies. Economists assess that a significant portion of the impact of this appreciation has not yet been reflected in import prices, which may moderate price growth when new inventories reach the market.
The labor market also continues to show strength. In June, a sharp increase in job vacancies was recorded, while the number of unemployed rose only moderately. The ratio between vacancies and the unemployed reached 1.17, indicating a persistent labor shortage and pressure for continued wage increases, a trend that supports inflation. Conversely, Leader notes that the decrease in the number of active-duty reservists may gradually alleviate the labor shortage.
Global developments also influence the local forecast. In the USA, economic recovery continues, particularly in the services sector, alongside increasing price pressures, strengthening expectations that the Federal Reserve will raise interest rates in the coming months. Simultaneously, signs of recovery are appearing in Europe, though rising oil prices increase the likelihood of further rate hikes by the European Central Bank.
Leader concludes that the combination of stubborn inflation, a strong labor market, security uncertainty, and restrictive global monetary policy is expected to keep the Bank of Israel on the sidelines for some time, making an interest rate cut in the near future unlikely at this stage.
