Rate stability expected on Thursday with a more neutral bias

ISRAEL - In Brief 05 Jan 2020 by Jonathan Katz
GDP growth in 2019 reached 3.3% (1.3% per capita)Drivers: Private consumption increased by 3.9%, public consumption 4.1% and service exports 9.0%.Weak growth: industrial exports up only 1.5%, and investments in fixed assets up only 0.3%.The public debt/GDP ratio is expected to decline in 2019 (below 61%), due to shekel appreciation (reducing the shekel value of the external debt) and a 5.7% increase in nominal GDP. This ratio reached 59.5% in Q319.We expect GDP growth in 2020 to reach 2.8%.In 2020 domestic demand is likely to slow on a tighter fiscal policy, including higher taxation (mid-year) and slower government expenditure.Weak global growth will also impact exports, although natural gas exports from Leviathan will contribute 0.4% to GDP.PC demand appears to be slowing modestly in Q419, according to both credit card purchases and chain store sales.Nevertheless, some wage growth, full employment and low rates support PC in 2020, moderated somewhat from higher expected taxation.Average wages are increasing by an annual pace of 2.5%-2.8%, supportive of PC demand as well as some inflationary pressure.Monetary policy: We expect rate stability on Thursday. The MPC is signaling that it prefers FX intervention to lower rates, with growth robust, labor market tight and global central banks ceasing to loosen. More important for the bond market will be the BoI macro forecast (rates especially) and the Governor's press conference. We think the Governor will signal a more neutral bias (from the previous loosening bias). The GDP forecast for 2020 (3% in the October forecast) could be revised slightly higher on some global stability with higher growth expected in 2021. The infla...

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