Israel’s economic growth stagnated and inflation slowed more than expected to almost within the government’s target range, making it more likely that the central bank will look past a weak shekel and keep interest rates on pause during a meeting in September.
Gross domestic product expanded a seasonally adjusted, annualized 3% in the second quarter, from a downwardly revised gain of 2.9% in the prior three months, according to data published on Wednesday.
A day earlier, figures showed consumer prices rose an annual 3.3% in July, compared with 4.2% in June, inching down to the goal of 1% to 3%. The median estimate was 3.5%, according to a Bloomberg survey of economists.
“The relatively dovish incoming inflation data raise the bar for how much FX developments would have to worsen to warrant additional rate hikes at this juncture,” Goldman Sachs Group Inc. analysts Tadas Gedminas and Kevin Daly said in a report
Read More: Israel Pauses After 10 Rate Hikes, Warns It May Not Be Done
The Bank of Israel, like its counterparts across the world, began hiking rates in early 2022 to counter quickening inflation. It’s raised them from near zero to 4.75% in that period, pausing after 10 straight hikes at the last meeting in July.
Shekel Factor
Plans by the government this year to overhaul the judiciary have rattled investors and increasingly put the shekel under pressure after triggering mass protests from opponents who fear an erosion of the country’s democracy.
Political uncertainty linked to the initiative forced more tightening than the central bank first envisaged, with weakness in the exchange rate making imports more expensive.
The shekel is among the worst performers this year among a basket of expanded major currencies tracked by Bloomberg with a loss of over 6% against the dollar.
Housing costs remained high, though grew at a slightly slower pace. Overall, monthly inflation was 0.3% in July, after remaining unchanged in June.
“We think that the central bank will leave the door open for further rate hikes and maintain its relatively hawkish stance, given that the shekel remains weak and exposed to domestic political developments,” Goldman’s analysts said.
--With assistance from Harumi Ichikura.
