Monetary decision disappoints the markets

ISRAEL - In Brief 25 Oct 2020 by Jonathan Katz

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Rates remained unchanged with little additional accommodation. Policy rates remain at 0.1%, Governor Yaron expressed little inclination to go to zero or negative. The bond purchasing framework was expanded by 35bn ILS, but the pace of monthly purchases is not expected to accelerate. LTRO’s will be offered at -0.1% rates towards small business credit.The commercial banks are not expected to jump at this due to the credit risk of many businesses. The BoI was surprised by the sharp recovery of the economy in the summer months, with only 5%-7% below pre-Covid activity. The Bank of Israel macro forecast was updated, including two scenarios: The optimistic scenario (Covid under control) sees -5% growth this year and 6.5% in 2021. The pessimistic scenario (weak Covid control) sees -6.5% this year and 1.0% next year. The fiscal deficit will reach 13% GDP this year (both scenarios) and 8%-11% next year. Inflation in 2021 will reach 0.6% (optimistic), and 0.1% (pessimistic). Economic indicators point to deceleration Broad unemployment in the second half of September surged to 19.1% from 11.5% in the first half, due to the shutdown. Consumer confidence is down to -32 points from -7 pre-Covid. Job vacancies declined by 8% in September following an accumulative increase of 58% since April. Credit card purchases increased slightly in the past week as some restrictions were lifted. The good news came from industrial exports which increased by 12% m/m in September, following two weak months, while imports increased in Q320 as the economy opened up. Moody’s decided not to change Israel’s “stable” A1 outlook for now. S&P is expected to report on Nov 14th. We expect a stable outlook unti...