More aggressive bond purchases likely

ISRAEL - In Brief 21 Jun 2020 by Jonathan Katz

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Highlights of Weekly Israel Wrap Up May's CPI surprised on the downside, reaching -1.6% y/y. Inflation declined by 0.3% m/m compared to expectations of +0.1%. Apparel prices declined sharply, reaching -10.5% y/y from -3.8% in April. Core inflation (exc. energy and fresh produce) declined by -0.5% y/y from +0.2% in April. Low inflation is clearly a weak demand story due to the Covid crisis. Inflation forecast: Our inflation forecast stands at 0.6% NTM, but only 0.2% stripping out energy prices. Petrol prices increased by 8.8% in June and are expected to increase by about 4% in July (at current Brent prices). We expect housing rental prices to decline modestly and contribute to low inflation. Monetary policy: Following May's lower-than-expected CPI, the voice of the doves on the MPC will be strengthened. In the last rate hold decision, one member (out of six) was in favor of a rate cut to zero. He may not be alone in the next decision. Negative rates appear unlikely, but zero is quite possible (not base case, with the Governor seeing inflation measurement as "problematic" during crisis) and/or more aggressive bond purchases. Recent data points to a partial recovery, PC remains low: Credit card purchases in mid-June were still down 11% YTD. Google mobility data shows mobility to work is down 12% from Feb 21st. Job vacancies increases by 45% in May, but still 55% below 2019 level. New home sales in April were down 60% y/y (due to shutdown). The PMI in May declined 0.8 points to 38.5, still reflecting contraction. The volume (floor space) of active residential housing is up 4.5% y/y in Q120, and 2.6% above 2019. This supports a strong supply in coming months which supports ...