Israel (BOI): soft May inflation keeps cuts on track

Research evidence excerpt

Israel (BOI): soft May inflation keeps cuts on track

mmunication has turned noticeably more dovish since the May

meeting. While policymakers initially emphasised geopolitical uncertainty and the

need for gradual easing, Governor Amir Yaron argued earlier this month that a

further decline in inflation expectations towards the lower end of the 1%-3% target

range could justify a “stronger and faster” easing cycle. Importantly, he linked this

shift to lower energy prices, a declining risk premium and continued shekel

strength. At the same time, Deputy Governor Andrew Abir's comments suggest

that FX intervention remains a secondary tool under current conditions, implying

that further rate cuts are likely to be the BOI's first line of response to persistent

currency strength. With one-year inflation expectations having eased to around

1.8%, we believe recent communication is increasingly consistent with additional

easing in the coming meetings.

We see the BOI as likely to reach our 3.0% terminal rate projection earlier than we

had previously expected, most likely this year, amid a significant easing in

inflationary pressures and continued shekel appreciation. We now expect three

additional 25bp cuts in July, August and November, with inflation likely to be

running around 1.5% y/y by August, close to the lower half of the target range.

Recent BOI communication has also become increasingly consistent with this

outlook, with policymakers placing greater emphasis on the disinflationary

implications of lower inflation expectations, shekel strength and softer energy

prices. While 3.0% remains our baseline terminal rate, risks around that view are

skewed to the downside. If inflation settles persistently in the lower half of the target

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