Bond purchases to come to an end on robust BoI outlook

ISRAEL - Report 12 Oct 2021 by Jonathan Katz


The BoI sounds increasingly optimistic

* The BoI expects growth to reach 7% this year and 5.5% in 2022. The cumulative growth forecast (12.9%) is 1% higher than previous forecast.
* Broad unemployment is expected to reach 5.2% in Q422 from a present 7.9%.
* Inflation to reach 2.5% in 2021 and 1.6% in 2022.
* The BoI rate forecast is pricing in a possible rate hike by Q322.
* The forward guidance is no longer pricing in additional accommodation.
* Bond purchase program to come to an end, unless we see a renewed serious spike in infections and restrictions

Fiscal deficit likely to reach below 6% this year: September’s fiscal data reflect strong tax revenues and declining Covid spending, as the cumulative fiscal deficit declined to 6.8% GDP LTM (adjusted for the holidays).

Economic indicators remain strong

* The CBS business sector survey reflects improving growth in August compared to July.
* Credit card purchases increased by 9.9% saar in June-August. Chain store sales remained stable following growth of 5.7%.
* Revenues from all sectors increased by 8% saar in May-July, with manufacturing up 8.5%.
* Hi-tech service exports in Jan-July are up 19% compared to avg 2020.
* The BoI composite index increased by 0.28% in September, in line with the long-term growth rate.

FX: The BoI purchased 1.0bn USD in September, and the ILS strengthened by 0.8% against the basket. Governor Yaron says the degree of FX intervention will depend on the pace of recovery. Strong hi-tech exports continue to support the shekel, offsetting the increase in merchandise imports. We note that the shekel has remained strong despite global market volatility.

The bond market: The BoI purchased 1.9bn ILS of government bonds in September and a total of 76.9bn out of the allocated 85bn program.

Inflation: We have revised our inflation forecast slightly higher, to 1.4% NTM (from 1.2%), on higher oil prices and the expectations that the housing purchase tax on investors will increase from 5% to 8%, contributing 0.1% to inflation. In the CBS business survey, industry expects inflation NTM of 1.38%, retail: 1.23%.

Covid: The number of seriously ill continues to decline rapidly, and some restrictions regarding the green pass for outdoor events (pools, health clubs, as well) have been cancelled.

Important data this week: Tuesday: CBS consumer confidence index (September), Wednesday: Trade data (September), Thursday: New home sales (August). Friday: September’s CPI. We expect 0.2% m/m (2.5%, up from 2.2% in August) on higher prices in housing, vehicles and education.

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