The shekel has weakened above the NIS 4/$ threshold for the first time since April 2015. This afternoon, the Bank of Israel set the representative shekel-dollar rate up 0.529% from Friday, at NIS 3.990/$, and the representative shekel-euro rate was set 0.327% higher at NIS 4.200/€. In afterhours inter-bank trading the shekel-dollar rate was up a further 0.29% at NIS 4.02/$ and the shekel-euro rate was up a further 0.81% at 4.221/€.
The Israeli currency has depreciated from NIS 3.863/$ since the war began nearly ten days ago.
Following the outbreak of war in the south of Israel, the Bank of Israel intervened with an announcement last week that it would sell $30 billion of its foreign currency reserves, which served to stabilize the shekel somewhat and halt the rise in the shekel-dollar rate.
Chen Herzog, chief economist at BDO Consulting Israel told "Globes" that, because of the war, Israel faces a severe economic slowdown. "Although the depreciation against the dollar translates into higher prices for imported products, Israel is no longer in a situation of demand-driven inflation," he says. "The Bank of Israel will have to cut interest rates, while at the same time the government has to put together a broad plan for fiscal expansion and a change in national economic priorities."
By contrast, Bank Hapoalim chief economist Victor Bahar writes in his market survey: "Cutting interest rates and selling foreign currency are contradictory. If the interest rate is cut sharply, depreciation pressure on the shekel will grow." In his opinion the Bank of Israel will leave its interest rate unchanged for the time being.
"Selling foreign currency is not something that central banks are keen to do, because it can signal distress, and in certain cases can even achieve the opposite of the intended result," Bahar explains. "In Israel, the situation is different for two reasons: a) the foreign currency reserves are exceptionally high; b) Israel has a balance of payments surplus."
Bahar points out that the amount of $30 billion that the Bank of Israel specified is high, and should be enough to stabilize the exchange rate even if the war lasts for several months. "To put matters in proportion, since the beginning of the year, the financial institutions have been buying foreign currency, but not more than $10 billion in total."
Published by Globes, Israel business news - en.globes.co.il - on October 16, 2023.
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