Isranomics

Israel’s economy: shekel continues to weaken while inflation anticipation rises

by | Mar 22, 2023 | Economy | 0 comments

The recent depreciation of the shekel and rising inflation expectations in Israel have raised concerns regarding the potential effects on the economy. Inflation projections from capital markets for this year have risen beyond the target range of the Bank of Israel, reaching 3.4%. This rise is due to the recent increase in the consumer price index (CPI).

The reading for February was 0.5%, with the overall inflation rate reaching 5.2%. In addition, the weakening of the shekel increases the price of imported goods, which in turn adds further inflationary pressures.

The Bank of Israel’s inflation target range is between 1% and 3%. The difference between the yields on bonds linked to CPI and those not linked to it determines market expectations. According to Bank of Israel data from February, capital market inflation expectations for the coming year were lower than the Bank of Israel’s upper target limit of 2.9%.

However, inflation expectations from additional financial instruments have risen above the target range, as have inflation expectations derived from the average projections of analysts in financial institutions. The forecasters’ expectations for inflation in March reached 3.1% for the next 12 months, above the Bank of Israel’s upper limit, while original consensus was for inflation to converge to the target range of 2.9%. This clearly demonstrates that inflation is not decelerating as anticipated, and markets are beginning to price in this reality.

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