According to forecasts, inflation is expected to fall below 3 per cent in three months. How does it fit in with the high dollar?
It is true that usually the immediate consequence of the strengthening of the dollar is the increase in inflation. This time the context is weaker than usual, for two reasons: first, we are entering a quarter of significant slowdown in growth, we are buying less, and therefore demand is decreasing, which also affects prices.
Secondly, let's look at which products the rise in the dollar usually affects. The immediate impact is always on car prices, travel prices, fuel prices and imported consumer goods. Following the war, demand for cars and vacations abroad dropped significantly. Regarding gasoline, assessments are that the government will continue to subsidize it in the coming months as well, so that its price will not rise due to the increase in the dollar.
Dollars, photo: Reuters (illustration)
In conclusion, if a depreciation of 10 percent in the shekel usually leads to an increase of 1 percent in inflation, today the effect is significantly less.
The Bank of Israel announced its foreign exchange trading intervention program, according to which it will sell $30 billion out of the $200 billion it has in order to halt the depreciation of the shekel. How much has he already sold?We don't know for sure how much he sold, we'll know at the beginning of the month. The Bank of Israel publishes the foreign exchange reserves once a month. We see that every day it intervenes in trade.
The Bank of Israel can increase the program beyond $30 billion, but not much beyond. Foreign exchange reserves currently stand at 38% of GDP. As the ratio of reserves to GDP declines, the perception of Israel's financial resilience suffers, which will lead to additional pressure to depreciate the shekel, and then it will have to intervene further. That's always the problem for central banks when they try to support the local currency, so they're reluctant to do it.
Still, the Bank of Israel has foreign exchange advantages of more than $200 billion, can it allow itself to sell more than $30?Beyond the $30 billion he has already announced, he has room to make another $15-20 billion. Beyond that, it will already reach levels that will begin to lead to more and more speculation about the shekel. But the assessment at the moment is that the Bank of Israel should not go there. 30 billion should be enough, if indeed we are talking about a war in Gaza that will last a month or two.
The Bank of Israel accumulated its foreign exchange reserves by purchasing at much lower rates than today, 3.10-3.20. On the face of it, it has a handsome profit. Should he transfer these profits to the government?First of all, if we talk about profit, then it should be not on paper but realized. According to the law, the Bank of Israel transfers its accumulated profits to the government. That is, not after one year.
Where else can the dollar go?Very much depends on security developments. It would not be correct at the moment to give exact numbers. At the current exchange rate, assessments are priced that the war will last several weeks or months, and that it will focus on the southern sector, without escalation on the northern front. If the situation worsens, it is reasonable to assume that there will be additional pressures for the depreciation of the shekel.
Answers courtesy of Psagot's chief economist and strategist, Uri Greenfeld
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