Why The Israeli Shekel Is Strengthening

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Includes: ISRA
by: Andrew Sachais

Summary

The Bank of Israel left rates unchanged in March.

Meanwhile, energy price declines continue to be an issue for price pressures.

With a strong underlying economy, however, the shekel could appreciate in coming months.

The Israeli shekel is strengthening as its central banks distances itself from further policy easing. The U.S. dollar has fallen against the shekel by over 3% the last few days, seen below.

Data provided by Trading View

In March, the Bank of Israel held rates unchanged, leading many to believe policymakers were distancing themselves from further easing measures. The rate was held at 0.1%, unchanged from the previous month, and above estimates. Since 2012, the benchmark lending rate has been cut from over 3%, to current levels, seen below. Policymakers justified their decision by stating the underlying economy was improving, while disinflation was largely a product of falling energy and utility costs

"The bank will use the tools available to it and will examine the need to use various tools to achieve its objectives of price stability, the encouragement of employment and growth, and support for the stability of the financial system, and in this regard will continue to keep a close watch on developments in the asset markets, including the housing market.

The rate of inflation as measured over the past 12 months was negative 1%, impacted on by declines in prices of fuel, electricity, and water.

According to the Research Department's staff forecast, as well as the average projection of private forecasters, inflation is expected to return to within the target range, near its lower bound, in the next 12 months; the projected rate of inflation based on banks' internal interest rates remains below the target range.

Medium-term inflation expectations declined slightly this month, and expectations for longer terms are at the midpoint of the target range," according to Globes.

Inflation has been one of the main concerns with regards to policy in recent months. In February, the inflation figure came in at an annual pace of -1.0%, down from the previous month's reading of -0.5%, as well as missing estimates for -0.22%. Since 2011, inflation has fallen from over 4%, to current levels. Much like the rest of the world, falling energy prices have been one of the largest contributors to the disinflationary spiral.

Lastly, strong growth measures have been viewed optimistically by central bank officials. In the fourth quarter, the economic growth figure came in at an annual pace of 6.8%, below the previous quarter's revised reading of 0.2%, while missing estimates for 7.2%. As violence in Gaza abated towards the end of 2014, economic activity in the region expanded.

"The economy bounced back quickly from the effect of last summer's Gaza war while a weaker shekel has been spurring higher exports, mainly to North America and Asia," according to Hareetz.

Israeli policymakers are becoming more optimistic about the economy, leading to a stoppage of rate decreases in March. Disinflation is largely attributed to transitive pressures, such as water and energy costs, which could stabilize in coming months. Meanwhile, economic growth rebounded as violence in Gaza slowed. With tighter than expected monetary policy decisions, the shekel increased drastically, and could further strengthen in coming months.

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