The BoI commits to FX purchases of 30bn USD in 2021

ISRAEL - In Brief 17 Jan 2021 by Jonathan Katz
Inflation came in slightly below expectationsThe CPI declined by -0.1% m/m (-0.7% y/y), we had expected 0.0%. Housing rental prices surprised on the downside. Core inflation declined to -0.4% y/y from -0.2% in November. The PPI (exc. fuel) declined by to -1.4% y/y from -1.3%. Low inflation is mostly due to the 5%-shekel appreciation (against the basket) in 2020 and the impact of the Covid crisis. We expect inflation in 2021 to reach +0.8% on the back of a slightly weaker shekel, stronger consumer demand (and higher rental prices), and higher commodity prices. FX: The Bank of Israel announced on Thursday a commitment to 30bn USD FX purchases in 2021. The BoI purchased nearly 21bn USD in 2020, and the shekel appreciated by 5.1%. The committed policy is likely to have a modest weakened impact on the shekel to 3.35-3.40 by the end of Q121. The Bank of Israel sterilizes the growth in cash (shekels) from FX purchases by allowing the commercial banks to increase deposits at the Bank of Israel. GDP contraction in Q420 likely to be modest Manufacturing exports expanded by 9.5% q/q in Q420, following 1% in Q320. Imports of consumer goods increased by 13%, other imports up 5%. The contraction in GDP in Q420 is likely to be moderate, if at all. The Ministry of Finance currently estimates that GDP contracted by only 3.3% in 2020, the BoI estimates -3.7%. Consumer confidence improved sharply in the second half of December on rapid vaccinations. Vaccinations proceed rapidly: The number of infections has stabilized at around 7,500 per day. 2.3 million people have already vaccinated, and 75% of all those ages 60 and above. The government will decide on Wednesday whether to extend the c...

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