Weekly highlights: Negative inflation y/y in Q1 will put pressure on MPC to act

ISRAEL - In Brief 16 Feb 2020 by Jonathan Katz

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Highlights:Inflation in January came in at the low end of expectations. Inflation reached -0.4% and declined to 0.3% y/y from 0.6% in Dec.Core inflation also declined to 0.35% y/y from 0.64%.Headline inflation is expected to decline further in coming months: to 0.0% y/y in February and -0.3% y/y in March.This is due to mostly to lower energy prices, but core also expected to stay low.We expect inflation to reach 1.1% in the NTM, 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.Q120 GDP growth reached 4.8% saar, 3.3% stripping out import taxes.Private consumption per capita excluding durables increased by 2.2%, exports were up by 2.4% and investments up 8.7%.GDP growth in all of 2019 was revised to 3.5% (from 3.3%).Economic growth remains robust, in line with potential.Merchandise exports have contracted into January, while imports remain fairly strong.Israeli institutions sold 2bn USD FX in December and 7.8bn in 2019.Deputy Governor Abir insists that FX intervention will continue in order to maintain Israel's growth rate at potential of 3%. Monetary policy: Although our base case scenario is for rate stability, declining inflation will put pressure on the MPC to act, especially if the global impact of the coronavirus persists and other central banks move to loosen.Politics: The latest polls still point to a deadlock between the left-center block and the right-wing block, with Lieberman still the tie-breaker. A fourth election round cannot be ruled out, if Netanyahu refuses to step down, Lieberman remains on the fence and ...