The high rate of inflation in April surprised even the Bank of Israel. Immediately after announcing the tenth consecutive rate hike on Monday, Bank of Israel Governor Prof. Amir Yaron told "Globes, "We identified high inflationary factors such as travel abroad and that resulted in a large part of the surprise for us as well as the rest of the professional bodies." In other words, the Bank of Israel has expected a much more significant fall in the rate of inflation, which is still running at 5% annually.
This week Bank of Israel Deputy Governor Andrew Abir was interviewed by "Reuters" after the rate hike announcement and provided explanations for at least some of the reasons for the high inflation and why the Bank of Israel's forecasts of its imminent fall have been mistaken again and again. Abir strongly stressed, "The progress that we would have expected on getting inflation back into the target has been slower predominantly because of (the shekel's) exchange rate and creation of the political uncertainty that we've seen over the last few months."
He added, "We've probably had to do more monetary policy tightening than we had envisaged because of the political uncertainty leading to an increase in Israel's risk premium, depreciation of the currency, and therefore inflation being higher."
Abir was also interviewed by "Bloomberg" and said that the extent of monetary tightening "has been the cost of the depreciation of the currency around the political uncertainty, increasing this premium for Israel around the judicial reforms." Since the start of 2023, the shekel has depreciated by 4% against the US dollar.
Abir added, Probably the predominant factor" behind the shekel’s depreciation this year is the change in the behavior of Israeli institutional investors. "They didn’t sell as many dollars to hedge their foreign exchange exposure as they would normally have done."
Abir's remarks can be fully understood by looking at the equation that existed in the market for a long time: the strong correlation between Wall Street and the shekel-dollar exchange rate. When the US stock market rose, Israeli institutional investors sold dollars and strengthened the shekel - and vice versa. Now this correlation has ceased and despite the increases on Wall Street in recent months, the dollar-shekel exchange rate remains high and has been hovering around NIS 3.55-3.70/$.
In recent months, since the announcement of the judicial reform, the Tel Aviv Stock Exchange (TASE) indices have also fallen. Since Minister of Justice Yariv Levin announced his plans to promote the overhaul of the judicial system, the indices on the TASE fell sharply: the Tel Aviv 35 index has fallen 2% and the Tel Aviv 90 by 7%.
In contrast, over the same time sharp increases have been recorded overseas. The S&P 500 index has risen by more than 7%, and the Nasdaq by 17%. Since the pause in the reform, the TASE has risen but the shekel has not recovered.
Published by Globes, Israel business news - en.globes.co.il - on May 24, 2023.
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