Inflation concerns rise as shekel continues to sink

The shekel continues to weaken sharply. In afternoon inter-bank trading, the shekel exchange rate is up 0.81% against the dollar at NIS 3.466/$ and up 0.91% against the euro at NIS 3.657/€.

Yesterday, the Bank of Israel set the representative shekel-dollar rate up 0.556% from Friday, at NIS 3.438/$, and the representative shekel-euro rate was set 1.012% higher at NIS 3.624/€.

The shekel is at its weakest for 20 months against the dollar, provoking concerns about imported inflation as global commodity prices rise. The Bank of Israel is also expected to raise interest rates in the coming months.

Harel chief economist Ofer Klein believes that the devaluation of the shekel brings the next Bank of Israel rate hike nearer. “Global inflation and the aggressive response of the US Federal Reserve has stimulated most central banks to raise interest rates and this brings concerns for a slowdown in growth and rise in volatility. The strengthening of the dollar worldwide has not excluded Israel and in the wake of this we revised our inflationary forecast upwards last week.”

In recent years the appreciation of the shekel supported relatively moderate inflation. The strengthening of the shekel stemmed from the current account surplus and rises in financial markets, which forced Israeli institutional investors to sell foreign currency in order to hedge their overseas investments in accordance with investment policies. The declines in the current account market have now forced the institutional investors to increase their securities and so demand for dollars on the local market has jumped. Despite the rebound in the markets today, local traders report that Israeli institutional investors have bought large amounts of dollars in recent days to cover the losses yesterday.

Leader Capital Markets wrote that it is no longer possible to rely on the appreciation of the shekel to moderate inflation. “Even though Israel is still expected to enjoy a current account surplus, it seems that market jitters will continue to support the devaluation of the shekel and offset the positive influence of basic factors. In January-February, Israeli institutional investors bought $7 billion in foreign currency. Against the backdrop of the continuing weakness of markets, it is more difficult to assume that the appreciation of the shekel will be a factor halting inflation, as happened in past years. Most macroeconomic factors support an acceleration of inflation.”

Prico Risk Management and Investments CEO Yossi Fraiman said, “In our opinion the shekel-dollar rate may already move towards NIS 3.5/$ in the near future. Interest rate hikes are also expected to rise in Europe in the summer due to the high level of inflation, which will support the battered euro.”

Published by Globes, Israel business news – en.globes.co.il – on May 10, 2022.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2022.


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