The Bank of Israel’s hike in the interest rate has halted the shekel depreciation, for now at least.
The Israeli currency started today’s session and a new week of trade by strengthening to NIS 4.9247/$, a 1.33% appreciation from Friday’s rate of NIS 4.991/$.
Trade is active and volatile. At one stage, the shekel reached NIS 4.915/$, but at web-posting has retreated to NIS 4.944/$, a 0.9% appreciation since Friday.
Meanwhile, the Israeli currency is also strengthening against the euro, to NIS 4.654/€, a 0.8% gain since Friday.
The shekel’s advance today follows the surprise announcement that the Bank of Israel will raise its key interest rate by 1.5% to 7.1%, effective Tuesday. After the announcement yesterday afternoon, the shekel immediately recovered from NIS 5.01/$ in shekel/dollar options trade, to NIS 4.94/$.
According to capital market assessments, the expected inflation environment for the next 12 months continued to rise towards 6% yesterday, over double the upper limit of the government's 1-3% price stability target for 2003 on. The rising inflation expectations and parallel slide in the shekel were the likely reasons behind yesterday’s interest rate hike.
The latest increase in the interest rate is the second in two weeks. During that period, the interest rate has risen from 4.6% to 7.1%. Over the past four months, the interest rate has risen 3.3%. When the latest rate hike comes into effect, Israel’s interest rate will offer a significant differential compared with US rates, which stand at 1.75%.
Published by Globes [online] - www.globes.co.il - on 10 June, 2002