Deflation appears likely in 2020

ISRAEL - In Brief 30 Mar 2020 by Jonathan Katz

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Highlights of our weekly macro report: The Employment Agency is reporting a huge increase in the demand for unemployment benefits. Unemployment is expected to reach 20%. We are revising our inflation forecast down to -0.3% in the NTM. This downward revision is due to the recession, lower energy prices, weakening demand, and expected lower housing rental prices. Petrol prices will decline by 17% in April, with the petrol tax remaining stable (the MoF was considering raising this tax). Offsetting this we expect some shekel weakness on the back of further market volatility. The Bank of Israel is expecting negative growth of 2.5% this year, 7% unemployment and a 7% fiscal deficit. This could be somewhat optimistic. Bond yields declined last week due to the BoI bond purchasing scheme, but yesterday witnessed some reversal. Despite a spike in the fiscal deficit this year, the MOF will be issuing 5.0bn ILS in April, as it did in March. We note that the MoF has at its disposal excess bond issuance from previous years totalling 35bn (through February). Monetary policy: The BoI announced that the commercial bank's required capital ratio will be reduced by 1% to 9% (for large banks). We cannot rule out further announcements this week from the Bank of Israel regarding lower rates to 0.1% (why wait until 6.4?) as well as a corporate bond purchasing scheme, following the government bond purchasing scheme announced last week. The BoI is slowly following in the footsteps of the Fed and the ECB. Politics: Gantz decided to enter into a coalition with Netanyahu with Netanyahu serving as PM for 1.5 years followed by Gantz. Only about half of Blue and White agreed to this move, the rest wi...