The dollar continues to fall against the shekel amid estimates of a prolonged ceasefire in exchange for the return of the abductees, along with the weakening of the dollar globally.
The American currency is currently trading around the level of NIS 3.7, when earlier in the morning it dropped to the level of NIS 3.69.
Governor Prof. Amir Yaron announces the interest rate increase, January 2023 (archive).
Photography: Yoni Rickner
Dodi Reznik, an interest rate strategist at Leumi Capital Markets, explains to "Israel Hayom": "The shekel continues the strengthening trend that began yesterday and completes a strengthening of more than 2% against the dollar and against the euro. The prospect of a hostage return deal and a cease-fire of one kind or another has increased. Also, the increase of the shekel in the last two days can be seen as a technical correction to the course of declines since the beginning of the year when the shekel weakened from a level of 3.6 NIS to the dollar to 3.8 NIS to the dollar."
Yossi Freiman, CEO of Prico Risk Management, Financing and Investments, adds: "The activities at the end of the calendar month, along with the fluctuations in the US stock market, lead to fluctuations in the local currency market. The fear among economists that the interest rate reduction in the US will be at a lower rate than the previous forecast, It leads to an increase in yields on dollar bonds and encourages the demand for the dollar. The estimate that in Europe they will begin to reduce interest rates in the summer and that the reduction of interest rates in 2024 may amount to 1%, contributes to the weakening of the euro against the dollar."
Will interest rates continue to fall?
The strong shekel, together with the return of inflation to the target range of the Bank of Israel, raises the question of whether the Bank of Israel will continue to lower interest rates in the economy in February as well?
This, after the month the interest rate dropped by 0.25% to a level of 4.5%.
Bank Leumi economists believe that in the upcoming interest rate decision, "all the conditions required for another interest rate reduction will not be in place", that is, the Bank of Israel will choose to wait and not reduce the interest rate on February 26.
will reduce the interest rate?
Governor of the Bank of Israel Amir Yaron (archive), photo: Oren Ben Hakon
The bank's review states that "In the coming months, inflation in Israel is expected, according to our estimation, to take another step closer to the center of the target (2%). Inflation throughout the developed countries is also expected to moderate gradually in the coming months, based on a variety of forward-looking indicators that point to a less tight labor market And business surveys indicating an expected slowdown in the rate of price increase, as well as the moderating effect of the tightening monetary policy.
So, at least in the inflation sector, in Israel and in the world, it seems that background conditions have been formed that allow the Bank of Israel to continue the interest rate reduction process, which began at the beginning of the year.
Of course, it is important to emphasize that there are risks to the inflation forecast in Israel that may delay its convergence to the target center, such as: an escalation in the war, tax increases, increases in import and shipping prices, and more."
However, Belaumi points out that inflation is only one parameter among a set of parameters examined by the Monetary Committee, as stated in the forward direction, in the latest interest rate decision: "The course of the interest rate will be determined in accordance with the continued convergence of inflation to the target, the continued stability of the financial markets, economic activity and fiscal policy."
The dollar against the shekel (illustration), photo: GettyImages
"As for the financial markets, a variety of indicators, such as the level of Israel's CDS, poor relative performance of the Tel Aviv stock market, the exchange rate of the shekel and others indicate a risk premium at a very high level in historical comparison, and one that corresponds to countries with a significantly lower credit rating from that of Israel.
Moreover, since the last interest rate decision, there has been an increase in these risk indicators, which reflect a worsening of Israel's perception of risk."
In addition, Blaumi points out that "in the fiscal field, the deficit from government activity has jumped sharply in recent months, and it is expected to increase steadily during the coming year (according to the Ministry of Finance's estimate, the deficit will amount to 6.6% of GDP in 2024). All this, when only recently the governor emphasized that the total adjustments that were presented in the budget proposal are lower than the expected permanent increase on the expenditure side, and he even believed that the implementation of the adjustments made on the revenue side should be brought forward already for the current year. So, in our estimation, it does not appear that in the upcoming interest rate decision (February 26) all the necessary conditions will be ripe for the Monetary Committee to reduce the interest rate, and it will remain No change, despite the drop in inflation into the target of price stability."
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