The latest data on consumer prices in Israel reveals a notable uptick, raising questions about the trajectory of the country’s interest rates. In March 2024, the consumer price index (CPI) surged by 0.6%, exceeding initial forecasts that had projected a 0.5% increase. Over the preceding 12 months, the index climbed from 2.5% to 2.7%, slightly surpassing economists’ expectations of 2.6%.

This increase was particularly pronounced in several sectors, with notable rises in miscellaneous goods (3.5%), clothing and footwear (2%), entertainment (1.5%), housing (0.6%), health (0.5%), and transportation (0.4%). Conversely, prices of fresh fruits and vegetables experienced a 3% decline.

In parallel, apartment prices continued their upward trend. According to data from the Central Bureau of Statistics, apartment prices saw a 1% increase when comparing transactions from January-February 2024 to those from December 2023-January 2024.

However, amidst these inflationary pressures, uncertainty looms over the Bank of Israel’s interest rate decisions. Matan Shetrit, Chief Economist at the Phoenix Group, noted that while the CPI slightly exceeded market consensus, core inflation rose by 0.7%, accelerating the annual rate from 2.2% to 2.3%. In the short term, inflation over the last three months surged from 1.9% to 3.1%, surpassing the target, and over the last six months, it increased from 2.1% to 2.3%.

Shetrit emphasized the Bank of Israel’s cautious stance, citing Governor’s remarks on stabilizing the inflation environment before considering rate adjustments. He highlighted ongoing global pressures, including currency depreciation and rising commodity prices, which contribute to domestic inflationary trends. Forecasts indicate a potential upper-bound inflation scenario for the coming year, further complicating the policy landscape.

Recent economic indicators suggest robust performance, buoyed by strong activity and labor market conditions. Moreover, the timing of potential interest rate cuts in the US, as reflected in market pricing, signals a shift away from imminent reductions. Therefore, it is expected that the Bank of Israel is likely to maintain its conservative approach, with minimal prospects for rate cuts in the near term.

In conclusion, while inflationary pressures persist and economic fundamentals remain strong, the trajectory of interest rates in Israel hinges on mitigating uncertainties and stabilizing inflationary expectations. With the central bank adopting a cautious stance, the likelihood of imminent rate cuts appears minimal, signalling a prolonged period of steady interest rates ahead.