Declining rental prices will support deflation

ISRAEL - In Brief 19 Apr 2020 by Jonathan Katz
Highlights of our weekly macro report:The Bank of Israel research dept. expected GDP growth to decline by 5.3% this year (while the IMF sees -6.3%) but increase by 8.7% in 2021. This assumes: PC will decline by 5.0%, investments by 11% and exports by 15%. Public consumption will increase by 5%. Unemployment (ages 25-64) will average 8% in 2H20 The fiscal deficit will reach 11% GDP and debt/GDP: 75%. Inflation is expected to reach -0.8% this year and 0.9% next year. This forecast includes a rate forecast of 0.0% to 0.1% by end 2020 and 0.0% to 0.25% by the end of 2021. Q419 GDP growth was revised to 4.6% (from 4.2%) on stronger PC and investment growth. Exc. taxes on imports, growth reached 3.1% in Q419. Inflation in March reached 0.4% m/m, slightly above consensus. The housing rental item surprised on the upside with rental prices holding steady at 2.0% y/y. Looking forward, we expect inflation to reach -0.3% in the NTM. Housing rental prices will decline by 1.5% on weak demand inventory growth. The shekel is expected to remain fairly stable on strong fundamentals. Israel will join WGBI at the end of April, with a weight of 0.29%. Monetary policy: The MPC decided to reduce rates to 0.1%, and in addition to provide 3-year loans to the banks at 0.1% interest, contingent on providing loans to small and medium sized businesses. In addition, the BoI will allow corporate bonds (in addition to government bonds) as collateral in the repo market. There is a hint towards lower rates in the following statement: "The Committee will expand the use of the existing tools, including the interest rate tool, and will be able to operate additional ones, to the extent that the crisis leng...

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