Discount Bank Warns of 90% US Interest Rate Hike Amid Market Fears

Einat Meir, head of the economic department at Discount Bank, has issued a stark warning regarding global and Israeli economic trends, highlighting a "90%" probability of an interest rate increase by the US Federal Reserve this week. This projection stems from August inflation data showing a 0.4% rise, with overall inflation at 3.4%, largely driven by energy prices. Core inflation also increased, though its annual pace moderated.

The Federal Reserve's upcoming meeting is expected to see a 25 basis point rate hike to a range of 3.75%-4%. While inflation forecasts may be revised upwards, core inflation projections could be adjusted downward due to methodological changes. Market attention is focused on the Fed chair's press conference, particularly given heightened uncertainty fueled by rising oil prices, concerns over government debt levels, and the new governor's reduced guidance on future policy.

In the Eurozone, the European Central Bank raised its interest rate by 25 basis points to 2.5% due to inflationary risks, anticipating inflation to remain above target for an extended period. Markets are pricing in over three additional rate hikes in the coming year, potentially reaching 3.35%.

Domestically, Israel's government deficit narrowed to 3.2% of GDP in the last 12 months, attributed to a 5% real increase in tax revenues, primarily from indirect taxes due to consumption growth. However, revenues from capital markets and property taxes declined, reflecting weakness in the housing market. Government spending rose 3.2%, below initial plans, with defense spending significantly exceeding projections. Despite increased spending, the deficit is expected to remain below the target.

Global government bond markets are experiencing rising yields due to increased inflation expectations, driven by oil price surges. The US Treasury's announcement of an increased bond buyback program to $6 billion was met with disappointment, as markets had anticipated a larger increase. This has led to a continued rise in yields, with US 10-year yields exceeding 5%, the highest since 2023.

In Israel, rising oil prices have increased inflation expectations, pushing them to 2% for the coming year. The strengthening of the shekel earlier in the year had mitigated the impact of energy prices, but its recent stabilization means higher energy and commodity prices will have a more significant effect on inflation. Discount Bank anticipates that the Bank of Israel will not be able to further reduce interest rates while oil prices and inflation risks remain elevated. Israeli government bond yields have also risen across the curve, influenced by both domestic inflation expectations and global yield increases.