Strong shekel insulates Israel from rising inflation

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative

As supply chain disruptions and bottlenecks push up prices in Europe, and North America, Israel has been partially protected by the appreciation of its currency.

The main factor moderating inflation in Israel at the moment is the strength of the shekel. Were the shekel not so strong then the commodity price rises due to the disruptions in the global supply chain, which is pushing up prices of imported products worldwide, would have been felt more strongly by Israeli consumers and businesses. But the strengthening of the shekel offsets much of these price rises.

Prices rise when too much money chases too few goods and around this economy theory there has been major cause for concern in recent months. Central banks are in no rush to reduce their expansionist policies, and supply chain disruptions are causing bottlenecks in supply. Product shortages push up prices and in a worst case scenario central banks will be compelled to hike interest rates quickly and aggressively, which would cause destructive repercussions and crises.

Israel is also partly insulated against the rise in energy prices. Electricity production and prices depend on natural gas and the country has fixed contracts with the owners of the offshore Tamar and Leviathan gas fields. Oil and shipping price rises do impact Israel and Bank Hapoalim analysts estimate that we will soon see the influence of the higher inflation the Europe and North America. "It will express itself in the prices of imported industrial goods and the prices for traveling abroad. The appreciation in the shekel exchange rate party offsets these influences but not all of them."

Since the start of 2021, the shekel has strengthened by 2.6% against the basket of currencies despite the Bank of Israel's aggressive foreign currency purchasing plan. While this makes it difficult for exporters, exports of traditional goods have risen by 18.6% over the past year while exports of mid-tech goods has risen by 15.5%.

In Europe, inflation is at a 13 year high while in the Us inflation was 5.3% on an annualized basis in August but in Israel inflation over the past 12 months has been a much more modest 2.2%. The bond market, which prices inflation over the next 12 months in Israel sees a rate of 2.5%, just above the middle of the Bank of Israel's 1%-3% annual target range.

The Bank of Israel is not concerned about inflation and before raising interest rates from its historic low of 0.25%, it is likely to reduce its bond buying program. The Bank of Israel is not expected to raise the interest rate before June 2022.

The Bank of Israel will meet to discuss the interest rate on Thursday and all eyes will be on its statement to glean any hints on this matter, or its foreign currency and bonds purchasing programs.

Mizrahi Tefahot Bank chief strategist Modi Shafrir said, "The interest rate market has begun to price the Israeli rate as beginning to rise in June 2022, even before the US rate hike (expected towards the end of 2022) despite the fact that the Bank of Israel has explained recently that the rate will remain low for longer, and despite the Bank of Israel's battle against the appreciation of the shekel."

Published by Globes, Israel business news - en.globes.co.il - on October 4, 2021

Copyright of Globes Publisher Itonut (1983) Ltd. 2021

Shekel-dollar ASAP Creative
Shekel-dollar ASAP Creative
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