Shekel gains after BoI keeps rate unchanged

Shekels credit: Shutterstock Vladerina32
Shekels credit: Shutterstock Vladerina32

Analysts expect five Bank of Israel interest rate cuts in 2024.

The shekel is strengthening after the Bank of Israel's announcement yesterday that the interest rate will remain unchanged at 4.75%. In afternoon inter-bank trading, the shekel-dollar rate is 0.62% lower at NIS 3.703/$, and the shekel-euro rate is 0.59% lower at NIS 4.056/€.

Yesterday, the Bank of Israel set the representative shekel-dollar rate down 0.348% from Friday, at NIS 3.726/$, and the representative shekel-euro rate was set 0.029% higher at NIS 4.080/€.

As the pause in fighting in the south is extended so that Hamas will release more hostages, several domestic and external factors are strengthening the Israeli currency.

One of these factors is the depreciation of the US dollar worldwide. Mizrahi Tefahot Bank chief economist Ronen Menachem says, "The dollar is weaker against a range of the world's main currencies as a result of recent data published in the US such as the US PMI (Purchasing Managers Index) and purchases of private homes, which show the US economy slowing."

Menachem says that the US data contributes to estimates by US economists that the country could be on the threshold of a recession in the coming months and the DXY which evaluates the dollar's performance has fallen to 103.2 basis points, its lowest level since August. "The weakness in the US increases expectations that interest rates in the US will fall very soon and this strengthens the weakness of the US currency."

Bank Leumi head of markets strategy Kobby Levi adds that the correlation between the strength of the US stock markets and the shekel has been restored. "The institutional bodies that have reached a foreign currency exposure of 20% have resumed responding to rises on the US market, and are selling dollars as a response to what is happening on Wall Street, and contributing to the strengthening of the shekel."

Above and beyond the global trend, there are also domestic influences, which include the Bank of Israel Monetary Committee's decision to leave the rate unchanged. Bank of Israel Governor Prof. Amir Yaron told the press conference yesterday that an interest rate cut will depend on the data and stability on the markets.

Menachem says that various factors mentioned in the interest rate decision are contributing to the strengthening of the shekel. "The Bank of Israel is continuing to focus on bringing down inflation and the stability of the shekel. It seems he is reluctant to cut the interest rate quickly. In addition, the Governor pointed out in his speech that the economy began to recover after the 'market' at the beginning of the war, and activity in the economy is returning to a certain normality."

Another factor mentioned by Yaron is the fiscal policy, which results from the government's decisions. He reiterated the importance of discretion in budget changes and called for exhausting existing sources before increasing the deficit. "If the fiscal policy increases the deficit without investing in growth-stimulating factors, the bank will respond with monetary restraint to balance the government's expansionary policy, which means that the interest rate will not fall."

In addition, Levi says that the Bank of Israel has not yet withdrawn its plan to stabilize the shekel by selling some of its foreign exchange reserves. "It is not yet possible to know how much and if the Bank of Israel intervened in the market in November, but its very presence and willingness to sell dollars in large quantities is a moderating factor for the exchange rate." Levi emphasizes that the governor stated in the latest interest rate decision that uncertainty still dominates the economy and therefore he is not taking the option of selling foreign currency off the table.

The market expects that the Bank of Israel Monetary Committee will cut the interest rate for the first time since 2020 at its next meeting on January 1. But Menachem finds it difficult to see a rate cut so soon. He explains that the Governor stressed the importance of future data, which will of course affect the shekel. If interest rates remain high, the shekel will continue to be strong.

Levi says, "The market operates according to expectations of a sharp interest rate cut, and the shekel exchange rate represents five interest rate cuts next year." If there are additional rate cuts, Levi says the shekel will fall as a result. If less, the shekel will gain. "The shekel is traded according to the market's expectations, and it will move according to the extent to which the expectations are met in practice."

Published by Globes, Israel business news - - on November 28, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.

Shekels credit: Shutterstock Vladerina32
Shekels credit: Shutterstock Vladerina32
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