October Inflation Expected to Rise Slightly, But Rate Cut Unlikely

Economists forecast that the Consumer Price Index for October, to be released Sunday evening, will increase by 0.2% to 0.4%. Despite this monthly rise, the annual inflation rate, currently at 1.6%, may actually decrease due to a higher comparison base from October of the previous year. However, even if inflation moderates, it is unlikely to convince the Bank of Israel to lower interest rates in its upcoming decision in eight days.

Forecasts for the index vary among institutions. Bank Hapoalim and Mizrahi Tefahot predict a 0.2% rise, while Meitav estimates a 0.4% increase. These differences reflect varying assessments of the impact of holidays, airfare prices, and seasonal cost increases in consumption categories. Yoni Fanning, Chief Strategist at Mizrahi Tefahot Bank's trading room, anticipates a 4% drop in the travel and flights sector in shekel terms, which would reduce the overall index by approximately 0.18 percentage points. Conversely, seasonal price hikes in clothing and footwear could support a monthly index increase.

Bank Hapoalim believes the chances of an interest rate cut have diminished. Moody Shprir, the bank's Chief Strategist, explained that recent election results, leading to a sharp weakening of the shekel, increased Israel's risk premium, and heightened political uncertainty, reduce the probability of a rate cut in the upcoming late November decision. The market is currently pricing in only an 18% chance of a rate reduction. Bank Hapoalim economists have also raised their inflation forecast for the next 12 months to 2.5% from 2.3%, primarily due to the shekel's depreciation.

The Chief Economist at Meitav Investment House, Chief Economist at Meitav Investment House, warns of renewed inflationary pressures. He raised his 12-month inflation forecast to 2.2% from 2.1%, stating that the shekel's depreciation has a greater impact on inflation than falling oil prices. He notes that the transmission rate of exchange rate changes to inflation in Israel is about 10%, compared to only 2% for oil price changes. Meitav's interest rate forecast is lower than Bank Hapoalim's, anticipating a drop to 3% in a year.

Developments abroad also complicate the picture. US inflation in October rose by 0.4%, exceeding forecasts, and core inflation rose by 0.3%, also above expectations. This strengthens the possibility that the US Federal Reserve will raise interest rates in December. Such a move could support a stronger dollar and make it harder for the Bank of Israel to lower domestic rates, as a cut in Israel alongside a hike in the US would widen the interest rate differential in favor of the dollar, potentially increasing pressure on the shekel.

The Bank of Israel's Monetary Committee will announce its next interest rate decision on November 23. While the current annual inflation rate of 1.6% is within the bank's target range of 1% to 3%, the situation is complex. The inflation rate for non-tradable components, mainly local services, rose to 2.6% in September. The bank's previous forecast, made before the elections, did not account for the full impact of recent political and financial developments. Therefore, even if the October index shows a moderation in annual inflation, it does not guarantee an interest rate cut. The crucial question for the Bank of Israel is whether the shekel's weakening, domestic price pressures, and US developments will lead to a renewed rise in inflation in the coming months.