The spike in inflation expectations is less justified in Israel

ISRAEL - In Brief 07 Mar 2021 by Jonathan Katz

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Inflation expectations have increased in Israel (and globally) Yet, Israel has had a very low inflationary environment in recent years. The structural current account surplus will continue to support appreciation. In addition, Israel’s hi-tech service sector will continue to attract inflows. Assuming a recovery, the BoI FX intervention is expected to diminish. The level of the cost of living remains high in Israel, and pressure to increase competition and encourage imports (food, pharma) will continue. We expect inflation to remain in the 1%-1.5% in coming years, making any move towards rate normalization rather difficult. FX: In February, the BoI purchased 4.9bn USD, following 6.8bn in January, or 39% of the 30bn FX purchasing scheme. This framework could be expanded if necessary. Bonds: The BOI purchased 4.4bn ILS in government bonds and 54.8bn out of the total 85bn framework. At this pace, this program will be completed by August, and will likely be tapered down (but not canceled). Private consumption expands Since the opening up of the closure in mid-February, credit card purchases have expanded by 11.3% (through 2.3.21). This trend is expected to accelerate with the opening up of many service sectors, especially restaurants (seated), events, and hotels. The CBS business tendency survey points to growing optimism regarding future growth in both industry, retail and services. The fiscal deficit reached 12.4% GDP in LTM; tax revenues remain strong. We expect the deficit to decline to 8.5% by end-year. The economy is opening up significantly. Today, restaurants will open up, as well as cultural activities, and weddings (with limitations). The important parameter of th...