Government bond purchases by BoI to come to an end on robust outlook

ISRAEL - In Brief 10 Oct 2021 by Jonathan Katz
The BoI sounds increasingly optimistic 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 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. 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, manufacturing is 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 long term growth rate. FX: The BoI purchased 1.0bn USD in September, and the ILS strengthened by 0.8% against the basket. Gov. 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 upwards to 1.4% NTM (from 1.2%) on higher oil prices and the expectations that the housing purchase tax on i...

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