Shekel depreciation puts pressure on BoI to hike rate

The Bank of Israel Monetary Committee will meet next Monday to decide whether to raise the interest rate again. The Bank of Israel research department has previously predicted that there will be one more 0.25% hike this year with the interest rate ending 2023 at 5% - the highest level since 2007.

Inflation in Israel is currently in a downward trajectory at 3.3%, similar to the US, and like there has a tight job market with very low unemployment, at the level that it was in 2019 on the eve of the Covid pandemic. This is among the factors pushing inflation higher.

Another major factor in Israel is the shekel, which weakened sharply last week and crossed above the NIS 3.80/$ threshold for the first time since March 2020. In inter-bank trading this afternoon, the shekel is slightly stronger, down 0.9% at NIS 3.796/$. The weaker shekel increases the prices of imported goods.

Mizrahi Tefahot Bank chief economist Ronen Menachem said that shekel volatility has recently intensified and since the beginning of August the shekel has depreciated by 4%. "The shekel is depreciating significantly against the dollar. The excess devaluation, as defined by the Bank of Israel, is estimated to be at least 10%. Therefore, the currency is an inflationary factor."

Menachem added, "The economic consequences of the judicial and security reality are unique to our economy and require great caution on the part of the Bank of Israel. The coming month is full of judicial developments that can significantly increase the volatility of the shekel."

Psagot chief economist and strategist Ori Greenfeld commented, "In Israel, the effect of the interest rate increases is expected to be more pronounced in the coming months." He believes that only after the US Fed reacts and changes its policy, will the Bank of Israel adopt similar rhetoric.

Published by Globes, Israel business news - en.globes.co.il - on August 28, 2023.