The BoI prefers FX intervention to lower rates

ISRAEL - In Brief 19 Jan 2020 by Jonathan Katz

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Inflation reached 0.6% in 2019, both headline and core.Housing (rental) prices continue to be the main driver of inflation, up 2.1% y/y (the larger housing item, making up 25% of the basket).Clearly the 8.3%-shekel appreciation against the basket was the main factor supporting low inflation in 2019.We expect inflation to reach 1.2% in 2020, assuming the BoI continues to intervene in the FX market to slow appreciation, housing prices maintain their present pace, and fiscal consolidation (and higher taxation) contribute 0.4% to inflation. Inflation is expected to decline to 0.1% y/y in March (on a base effect), possibly increasing expectations for lower rates.The Ministry of Finance expects the fiscal deficit to reach 4.2% in 2021 without any consolidation, above the 2.25% target. The target is likely to be revised upwards. Revenues from the natural gas sector are expected to reach 0.7bn USD this year increasing to 1.4bn USD in 2030.The PMI declined by 1.0 point to 51.8 in Dec. as export orders contracted.Trade data in Q419 points to contraction of 9% saar.Job vacancies increased by 2.6% m/m in Dec as the labor has tightens.Monetary policy: We continue to expect rate stability this year. The Governor has set a fairly high hurdle bar for a rate cut, including a renewed global easing cycle and much slower growth. FX intervention is clearly the main policy tool following FX purchases of 4bn USD in Q419, the shekel appears to have stabilized. Politics:The list of the parties have been drawn up. The two left wing parties have merged insuring that the united party makes it above the minimum threshold. On the right, two right wing parties have merged, leaving out the fringe rig...