The recession and deflation support further accommodation

ISRAEL - In Brief 18 Oct 2020 by Jonathan Katz

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Highlights:Inflation in September declined by -0.1% m/m and -0.7% y/y. Core inflation reached -0.4% y/y following -0.5% in August. Eight out of the ten major CPI items were zero or negative y/y. The PPI (excluding energy) declined by 1.9% y/y. Deflation in Israel is due to the steady shekel appreciation, weak consumer demand due to the crisis, and lower energy costs. We expect inflation to reach 0.4% in the NTM, supported by some improvement in domestic demand, higher commodity prices and housing rental prices. A moderate shekel appreciation is expected. Economic indicators point to deceleration Credit card purchases declined by 35% since the second lockdown. The Google Mobility to/from work is down nearly 30%. Both consumer and business confidence declined in September. Monetary policy: In light of expectations of a more prolonged shutdown, and only a gradual opening of the economy, we think further accommodation on 22.10 appears increasingly likely. What are the options? Rates could be reduced to zero (from 0.1%). This already had the support of one member (out of six) in the previous decisions (we see a 60% probability of lower rates). The government bond purchase program could be expanded to say, 80bn ILS, from the present 50bn (high probability). The BoI could offer long-term loans to the commercial banks (LTRO) at negative interest rates under the condition that this is passed on as credit to the private sector, similar to the ECB (slightly under 50% probability) Strengthening the forward guidance, assuring low rates through 2022 or later, similar to the Fed’s message. (very high probability). The bond market is likely to witness some yield curve flattening if po...