Deflation and renewed closure likely to support further loosening

ISRAEL - In Brief 21 Sep 2020 by Jonathan Katz

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Highlights of the Weekly Israel Macro Wrap Up 21.9.20 Inflation surprises on the downside Inflation remained stable m/m in August below market expectations of 0.2% m/m. Inflation in August declined to -0.8% y/y (from -0.6% in July). Core inflation move lower to -0.5% y/y (from -0.4% in July). Eight out of the ten major inflation items were negative y/y, except for housing (0.7%) and fresh produce (2%). We expect inflation to reach 0.4% in the next 12 months, in part due to technical factors such as “travel abroad” which is not being currently measured. The shekel is expected to appreciate modestly, as the BoI continues aggressive FX purchases in order to offset strong CA surplus and net FDI. Monetary policy: pressure for looser policy will increase on 22.10, this could include zero rates, and/or possibly providing LTRO at negative rates. The current surplus increased in Q220 to 4.4bn USD from 3.5bn on a stronger service surplus and a lower trade deficit. Net FDI reached 9.8bn in Q220 following 4.0bn the previous quarter. Housing starts declined by 27% y/y in Q220 due to the closure, while housing completions increased by 10%. Increasing inventory in the short run support weak rental price pressure. Unemployment (broad measurement) declined to 11.8% in the second half of August from 12.4% in the second half of July. The renewed closure is expected to push unemployment back up to 16% (at least) in the short run. Job vacancies have increased by 59% since April, but are down 41% y/y. Consumer confidence increased slightly in the second half August but remains close to historic lows. The PMI increased by 3.3 points in August to 53.1 on strong export orders and employment. W...