Goldman Sachs believes that the shekel will strengthen. In a new currency report, analyst Ahmet Akarli predicts that the shekel-dollar exchange rate will fall to NIS 3.60/$ in three months and to NIS 3.55/$ in six months, before rising slightly to NIS 3.60/$ in twelve months.
Arkali also predicts that the shekel-euro exchange rate will fall to NIS 5.58/€ in three months and to NIS 5.50/€ in six months, and to NIS 4.86/€ in twelve months.
Arkali says, "The Bank of Israel has been aggressive in cutting policy rates, but now it is reversing course. It has ceased to purchase treasury bills, scaled down foreign exchange interventions, and delivered surprise 25-basis point hikes in August and November, aimed primarily at anchoring inflation expectations, which had deteriorated in recent months."
Arkali adds, "We believe it will continue to hike rates, albeit at a measured pace, ensuring that it does not prematurely arrest Israel's budding economic recovery. In the meantime, the Bank of Israel will continue to intervene in the foreign exchange market to check shekel appreciation. But pushing rates and foreign exchange in opposite directions runs the risk of undermining the credibility of the inflation target framework and is therefore unsustainable over the medium run."
Arkali concludes that the Bank of Israel will eventually stop intervening in the foreign exchange market, focus on formal inflation targeting, and will raise the interest rate to a more neutral level of 3% within 12 months.
Published by Globes [online], Israel business news - www.globes-online.com - on December 10, 2009
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