Speculation about the end of the Bank of Israel's program of buying dollars drove the shekel-dollar exchange rate down today. The representative rate was set at 4.017/$, 1.81% lower than yesterday. In inter-bank trading after the representative rate was set, the rate fell even further, and it is currently just under 4/$. Today's shekel-euro representative rate was set at 5.5308/€, 1.09% lower than yesterday, and that rate too has continued falling.
Citi analysts said yesterday that after meeting with Bank of Israel Research Department director Dr. Karnit Flug, they believed that the Bank of Israel will need to gradually end its program of buying dollars. It currently buys $100 million per day. They based their claim on Flug's noting that the shekel-dollar exchange rate was "closer to equilibrium than in 2008."
Yesterday, the Bank of Israel denied this and said it will continue buying dollars.
Citi analysts also said that inflation expectations have risen quite sharply in recent weeks, with the capital market’s expectation of inflation in 24 months rising to 2.4% in April from 1.7% in March. Consumer Price Index (CPI) growth forecasts for 2009 are also rising, and Citi now expects the year end 2009 figure to be 2.3%, up from 1.8% last month.
Citi said that Dr. Flug noted several factors that concern the Bank of Israel regarding inflation: rising global commodity prices, the shekel-dollar exchange rate, the anticipated rise in value added tax (VAT), and the sharp rise in money supply.
Economists generally expect the Bank of Israel to leave the interest rate unchanged for June at 0.5%.
Published by Globes [online], Israel business news - www.globes-online.com - on May 21, 2009
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