Why The Israeli Shekel Could Continue To Decline

Includes: ISRA
by: Andrew Sachais


The Israeli lending rate remains at multi-year lows.

Both economic activity and inflation measures continue to weaken in Israel.

As interest rates are likely to stay suppressed in 2015, the shekel should continue to depreciate against the U.S. dollar.

The Israeli shekel could continue to decline as weakening inflation and economic growth weigh on the country's lending rate. Since August, the shekel has depreciated against the U.S. dollar by over 16%, as is seen in the chart below.

Data provided by Trading View

In January, the Bank of Israel chose to leave its lending rate unchanged after a steady pace of lowering the rate the last few years. On Monday, the Israeli central bank left its lending rate at 0.25%, unchanged from the last meeting, as well as in line with estimates for 0.25%. Since 2011, the Bank of Israel lowered its lending rate from over 3%, to now just 0.25%, as is seen in the chart below.

"The Bank of Israel Monetary Committee, headed by Governor Dr. Karnit Flug, has kept the rate unchanged since reducing it to a historic low, in the decision for September, at the end of August. It is of the opinion that the current level of the interest rate supports the continuation of the recovery in economic activity, and the return of inflation to within the target range," according to a report by Israeli business publication, Globes.

Data provided by Trading Economics

The pace of inflation in Israel has been plagued by declining energy prices, as well as structural factors as economic activity slowed in 2014. In December, the annual pace of inflation came in at -0.2%, below the previous month's reading of -0.1%, as well as missing estimates for 0.38%.

Since 2008, the annual pace of inflation has fallen from near 6%, to now deflationary conditions, as is seen in the chart below. As the price of oil declined in 2014, Israeli inflation readings moved broadly lower. Moreover, conflict near the Gaza Strip adversely affected economic growth, leading to weakness in economic activity, and the lack of price pressures associated with a strengthening economy.

Data provided by Trading Economics

Economic activity broadly declined in Israel during 2014 as violent conflict in Gaza led to less output. In the third quarter, the annual economic growth figure came in at 1.85%, below the previous quarter's revised pace of 2.57%, as well as missing estimates for 1.64%. Since 2010, the pace of economic growth slowed from near 6%, to now under 2%, as is seen in the chart below.

"[In 2014], the Israeli economy posted its lowest annual growth since 2009 due to sluggish exports, the effect of the summer war and a decline in investment as home buyers waited for a tax cut that eventually was scrapped," according to Businessweek.

The Bank of Israel has made an effort in recent months to intervene and weaken the shekel to spur export growth. While the hard work is beginning to pay off, weakening inflation measures, due to falling energy prices, as well as pervasive weakness in economic growth mean that low interest rates will likely continue in 2015. As the U.S. dollar remains on an upward trajectory, expect the shekel to continue to weaken against the U.S. currency in coming months.

Data provided by Trading Economics

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