JPMorgan Signals Uncertainty Over Israel's September Interest Rate Cut

JPMorgan's latest analysis complicates expectations for an interest rate cut by the Bank of Israel in September. Although June's inflation rate dropped to 1.6%, below the central bank's target midpoint, suggesting a rate reduction was likely, JPMorgan highlights underlying inflation dynamics that raise caution. While headline inflation fell from 1.9% to 1.6%, the inflation rate for services surged from 1.7% to 2.8%, median price changes shifted from negative to positive, and rent prices have risen sharply at an annualized rate of about 8%, well above the inflation target.

Additionally, JPMorgan revised Israel's second-quarter GDP growth estimate upward to an annualized 10.5%, reflecting a technical rebound from a 3.8% contraction in the first quarter due to disruptions from the 12-day conflict, rather than genuine economic acceleration. This strong growth, combined with rising service inflation and a recent depreciation of the shekel, creates monetary policy pressures against lowering interest rates.

Despite these factors, JPMorgan maintains its forecast for a 0.25% rate cut in September and a 3% interest rate by year-end. This stance is largely based on the Bank of Israel's continued foreign currency purchases, which JPMorgan interprets as ongoing monetary easing through the forex market. This interpretation contrasts with the Bank of Israel Governor Amir Yaron's public statements that recent interventions address market dysfunctions rather than serve as monetary policy tools.

JPMorgan warns that if the shekel weakens further or inflation surprises upward in the coming month, the September rate decision could become a pivotal moment, potentially halting monetary easing. The central question for the Bank of Israel's monetary committee will be whether these currency interventions are truly technical or indicative of a broader policy stance influencing interest rate decisions.