Shekel gains sharply after unexpected rate hike

Shekel Photo: Shutterstock

Leader Capital Markets macroeconomist Yonatan Katz: The Bank of Israel will raise the interest rate again in the second quarter of 2019.

The shekel is strengthening sharply this evening against the dollar and against the euro after the Bank of Israel unexpectedly raised the interest rate from its historic low of 0.1% to 0.25%. The interest rate has been unchanged since March 2015, when it was last cut, and this is the first rate hike since June 2011. In response in after-hours inter-bank trading, the shekel-dollar exchange rate is down 0.55% against the dollar at NIS 3.709/$ and down 0.59% against the euro at NIS 4.213/€.

Earlier this afternoon, before the rate hike was announced, the Bank of Israel set the shekel-dollar representative rate down 0.214% at NIS 3.729/$ from Friday's rate and set the shekel-euro rate down up 0.282% at 4.238/€.

Acting Governor of the Bank of Israel Nadine Baudot-Trajtenberg, who was chairing the Monetary Committee meeting as Karnit Flug has ended her term of office as Governor, while her successor Amir Yaron will not assume the job until next month said after announcing the decision, "We thought that the conditions were ripe for a rate hike. It's a small rise from 0.1% to 0.25% but a significant one because it comes after almost four years in which the rate was unchanged. Inflation has already returned to the Bank of Israel's target range but remains low. We thought that we should be certain that inflation is strong within the range. We think that growth in the economy is still at a good level."

Baudot-Trajtenberg stressed that the Monetary Committee discussed whether it was appropriate to make such an important decision while the Bank of Israel was 'between Governors' but it was decided that only the relevant economic data should be taken into account in making the decision.

Most analysts had expected the Bank of Israel to leave the interest rate unchanged but one analyst who called the decision correctly was Leader Capital Markets macroeconomist Yonatan Katz. He said, "As we forecast, the bank of Israel raised the interest rate today by 0.25% with the announcement stressing that inflation had stabilized somewhat above the bottom of the range, and there were expectations of salary raises and an expansive fiscal policy that will support consolidation of inflation within the target range. Growth in the economy is moving towards potential growth and there is full employment. The shekel has depreciated by 3.6% since the previous rate decision and the housing market is stable."

Katz added, "The path of future rate hikes will be gradual and cautious. We expect a rate hike in the second quarter of 2019 and then no change until the end of the year, while the US Federal Reserve will find it difficult to continue raising the interest rate in the second half of 2019."

Published by Globes, Israel business news - en.globes.co.il - on November 26, 2018

© Copyright of Globes Publisher Itonut (1983) Ltd. 2018

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Shekel Photo: Shutterstock
Shekel Photo: Shutterstock
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