Despite weakening shekel, inflation to remain subdued, the BoI commences bond purchases

ISRAEL - In Brief 16 Mar 2020 by Jonathan Katz

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Highlights of our weekly report: February's CPI declined by 0.1% m/m and 0.1% y/y (from 0.3% in Jan). Looking ahead, we expect inflation to reach 0.7% in the NTM, with the impact of a weaker shekel being mostly offset by weak consumer demand and lower energy cost. Economic data for February remains mostly positive but expected to drop sharply: The CBS consumer confidence index improved to -6 points in February from -9 points in January (average 2019 = -9.25%). Industrial exports contracted by 2.9% saar in Dec-February, mostly pharmaceuticals and electronic components. Consumer imports (excluding vehicles) continued to expand. New home sales increased by 32% y/y through January. On the other hand, the number of job vacancies decreased by 4k in January-February, an indicator of weakening growth. Looking ahead, the economy is expected to contract by 2%-3% this year. Most sectors will be impacted by Corona and global deceleration: tourism, private consumption, investments and exports. Last week the shekel weakened further by 3.7% against the Euro, and by 4.8% against the dollar. In the past month, the shekel has weakened by 6.8% against the basket of currencies. This is due in part to the sharp decline of global share prices which reduces sharply the FX exposure of major Israeli institutions who must therefore reduce FX hedging if they want to maintain a steady rate of FX exposure. This trend is likely to continue as long as markets remain volatile. Monetary policy: The MPC announced that the Bank of Israel will provide liquidity in the Repo market as well as purchasing government bonds, in order to reduce long-term yields which have spiked recently. They did not go into s...