BoI tapers bond purchases, but FX intervention remains strong

ISRAEL - In Brief 09 May 2021 by Jonathan Katz

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Economic indicators continue to point to a strong recovery The Poalim Consumer Confidence Index returned to pre-Covid levels. Disposable income increased by 2.1% y/y in February. The CBS Business Survey points to expansion in most sectors. In this business sector survey, inflation expectations increased to around 1% for the next 12 months, still below pre-Covid levels. The fiscal deficit in the LTM declined to 11.2% from 12.1% last month as tax revenues increased by 32% compared to April 19. We expect the fiscal deficit to reach 6%-7% GDP this year Inflation: We have updated our inflation forecast to 1.1% for the next 12 months (from 1.0%) due to the sharp recent spike in commodity prices. We still see shekel appreciation supporting relatively low inflation. FX: In April, the BoI purchased 5.3bn USD in order to slow shekel appreciation. This follows purchases of only 1.9bn in March. The shekel did appreciation by 1% against the basket in April. Two thirds of the present 30bn USD intervention scheme have already been utilized, although this framework will likely be expanded if necessary. The BoI seeks to slow but not prevent shekel appreciation. The bond market: In April, the BoI purchased 3.4bn of government bonds, down from 4.1bn in March and 3.4bn in February. The Bank of Israel is already “tapering” tacitly, without a formal declaration. So far, 62.3bn out of the designated 85bn program have been purchased. We note that the MoF has reduced bond issuance as well, therefore we do not see BoI tapering as a factor supporting higher yields. Few restrictions remain: Nearly all restrictions on activity have been lifted as 5.1ml Israelis are fully vaccinated (85% of all tho...