Steepest Deflation Awaits Israel With Rates Already at Zero
Steepest Deflation Awaits Israel With Rate Already Stuck at Zero
(Bloomberg) --
The economic wreckage of the coronavirus pandemic in Israel may include a bout of deflation, according to the International Monetary Fund.
Israel, which hasn’t experienced a sustained period of price declines since 2016, may a see a drop of 1.9% in consumer costs this year, the steepest among all forecasts published Tuesday in the IMF’s updated economic outlook. With the key interest rate at 0.1% after a recent cut, the outlook sets out the challenges likely to face Israel once it’s able to move past the worst of the outbreak.
“If there continues to be negative inflation, it could worsen the crisis and make it harder to exit,” said Rafi Gozlan, chief economist for Israel Brokerage and Investments Ltd. in Tel Aviv. The central bank could pump more credit to households in such a scenario, but fiscal tools would also be needed to spur demand since rates are already so low, Gozlan said.
Israel struggled with moribund inflation long before the outbreak shuttered the economy, and central bankers are now warning that plummeting demand will further drag down consumer prices. Unemployment has surged during the pandemic -- from below 4% to more than 25% -- and hundreds of thousands could still remain jobless at year’s end. Israel’s stimulus effort has so far ranged from sovereign bond purchases by the central bank to a fiscal package aimed at helping businesses and employees contend with the fallout.
In March, prices didn’t rise in Israel from a year earlier for the first time since inflation was last below zero almost three years ago. The Bank of Israel’s latest research staff forecast is for consumer prices to drop 0.8% this year before rising 0.9% in 2021 -- still below the 1% to 3% target range.
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