The shekel is strengthening this morning at the opening of the week's trading on the foreign exchange market, following the CPI reading for January released on Friday.
The CPI fell by just 0.1% in January, compared with estimates of a fall of 0.3-0.4%, with twelve-month inflation returning to within the 1-3% target range, at 1.2%. The CPI reading is seen by some as a possible trigger for an interest rate hike by the Bank of Israel.
The shekel-dollar rate is currently down 0.64% in comparison with Friday's representative rate, at NIS 3.6178/$, while the shekel-euro rate is down 0.4%, at NIS 4.0894/€.
After the Bank of Israel's surprise interest rate hike in November, the coming rate announcement, on Monday next week, has not aroused unusual interest, as central banks around the world are not making noises about raising their rates, and it is hard to see the Bank of Israel springing another surprise with an interest rate hike next week that would widen the interest rate gap between the shekel and the major currencies. Nevertheless, following the January CPI reading, there are dissenting voices in the market.
"The pressure on the Bank of Israel to raise its interest rate could surprise the market," writes Yaniv Hevron, chief strategist at investment house Alumot. "The Bank of Israel will raise rates rapidly over the next two years, fearing that the time for normalizing monetary policy is shortening." Hevron bases his estimate on the assumption that the Bank of Israel shares the concern of its US counterpart to stockpile ammunition in the form of higher interest rates in order to be able to deal with the next financial crisis.
A review by Leumi Capital Markets, on the other hand, states that the Bank of Israel can be expected to wait before raising rates further, and that the January CPI figure does not appear to be a factor that will bring the next rate hike forward, since, after temporary developments are discounted, the inflation rate is not yet approaching the 2% midpoint of the target range that the central bank is aiming for. "The next interest rate by the Bank of Israel will not come before July, following the US Federal Reserve decision in June, and to some extent depending on that decision being to raise rates."
Bank Hapoalim too does not see the Bank of Israel raising its interest rate in the next few months: "Global conditions have changed, and central banks around the world are now disposed to halt interest rate rises. We therefore believe that the Bank of Israel will not raise its rate in the next few months. We estimate that, in the light of the rise in the fiscal deficit and its consequences for inflation, the Bank of Israel's interest rate will rise in the second half of the year."
Published by Globes, Israel business news - en.globes.co.il - on February 18, 2019
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