This morning, the shekel has strengthened somewhat against the US dollar: the shekel-dollar exchange rate has fallen 0.33% from Friday's representative rate to NIS 3.7809/$. Last week, the rate rose 2.5%. The shekel-euro rate is up 0.07%, at NIS 4.7966/€.
The Bank of Israel will publish its interest rate decision for November at 16:00 today, with some analysts predicting that the central bank will cut its key lending rate from the current 0.25% to 0.15% or even 0.1%.
Among the factors that might lead the Monetary Committee to decide on a further interest rate cut are the weakness in the global economic environment, particularly in Europe; the IMF's reduction in its growth forecasts; inflation in Israel running below forecasts and substantially below the government's 1-3% price stability target range; sharp falls in commodity prices that are expected to feed through into low inflation in the coming months; and signs of a cooling off in the Israeli housing market. On the other hand, the shekel has continued to depreciate steeply since the previous interest rate decision. The possibility also exists, as Governor of the Bank of Israel Karnit Flug has hinted in remarks to the press, that the bank will embark on a quantitative easing program (buying up government bonds), or use other less conventional monetary tools.
FXCM Israel says this morning that where central banks have reduced interest rates to zero, a quantitative easing program has followed, "and so if the Bank of Israel does cut its interest rate today, it is likely that it will announce, or at least hint at, a quantitative easing program, which of course will reinforce the trend of a weakening of the shekel in the coming months."
FXCM says there is no technical sign of the depreciation of the shekel coming to a halt, and that the next target will be NIS 3.8/$ or slightly above. "If the Bank of Israel does announce expansionary monetary measures," FXCM writes, "that will probably not be the final target, and the upward momentum in the exchange rate will continue. On the other hand, if the speculation about quantitative easing proves wrong, the currency speculators may choose to stop at this level and take profits, and we shall see something of a downward correction."
Published by Globes [online], Israel business news - www.globes-online.com - on October 27, 2014
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