Economists Predict Interest Rate Cut Amid Moderating Inflation

Senior economists from Lider Capital Markets have released a weekly economic review suggesting a potential interest rate cut in Israel, despite a tightening labor market. The report highlights moderating core inflation, which fell to 1.3% in August from 1.5%, and a slight appreciation of the shekel, though underlying factors supporting its strength have weakened. While inflation remains low, there are concerns about future acceleration due to rising global commodity prices and fiscal adjustments.

The Israeli economy shows strong real activity, with a 0.9% increase in the economic activity index in August and a 2.0% rise in credit card purchases. The labor market remains tight, with unemployment dropping to 2.8% in August from 3.1% in July, and the ratio of job vacancies to unemployed individuals increasing. These factors present a mixed picture for potential interest rate adjustments.

The economists noted a significant increase in Nvidia's exports, which, while boosting Israel's gross exports, do not significantly impact the current account due to undistributed profits. This means the shekel may be more sensitive to external factors like U.S. market trends and institutional foreign currency exposure.

Construction data shows a discrepancy between housing starts and completions. While starts remain robust, completions were lower in the second quarter, possibly due to a slowdown in demand or reporting issues. Despite this, the overall number of housing starts is expected to meet current demand.

Globally, the U.S. Federal Reserve raised interest rates with a hawkish message, signaling potential further increases this year. This has contributed to a flattening yield curve and lower long-term yields. The report suggests that if commodity prices moderate and the shekel stabilizes around 3 shekels per dollar or lower, Israel has room for another interest rate reduction.