Rates remain stable today, with a more upbeat undertone

ISRAEL - In Brief 04 Jan 2021 by Jonathan Katz

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Governor Yaron sounds more optimistic Policy rates remained stable at 0.1% today, as expected. In the press conference, BoI Governor Yaron sounded cautiously optimistic, stating that he sees a greater probability of the optimistic growth scenario of the BoI Research Dept (6.3% in 2021 and 5.8% in 2022, assuming full vaccination by May 21).In this scenario, broad unemployment reaches 7.7% in end-2021 (from 16.4% in end-2020), inflation reaches 0.6% (0.9% in 2022), the fiscal deficit declines to 8% (from 12% in 2020) and 3.8% in 2022, and the debt/GDP ratio reaches 77% in 2021 and 75% in 2022.In the more negative scenario, inoculation is prolonged until mid-2022, and growth is therefore a weaker 3.5% in 2021. The Governor said that assuming the optimistic scenario, the government bond purchasing program will be reassessed by the summer of 2021 (when the current 85bn ILS framework runs out), inferring that it could be reduced. The same message was conveyed regarding FX intervention, which he stated will continue as long as the crisis continues, although so far export growth remains strong and does not appear to suffer from a strong shekel. The “window” of appropriate shekel range is dynamic; a function of economic growth. Bottom line: a rapid recovery scenario supports further shekel appreciation and higher yields, especially in the second half of 2021.