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The continued slow appreciation of the US dollar against the shekel depends on the Bank of Israel analysts said ahead of Monday's interest rate decision by the central bank.
"It is not all that clear whether the Governor of the Bank of Israel Stanley Fischer will today cut interest rates by a quarter percentage point to 4.25 percent as is forecasted," said Golan Sapir, who manages the NIS 12 billion PKN Plus mutual fund for Prisma Capital Markets Ltd.
in Tel Aviv. "If Fischer decides to lower interest rates today, the shekel will weaken to about 4.26 or 4.27 against the dollar and if not we might see the $/NIS exchange rate remain stable at 4.20 and below."
Sapir added that although, the economic situation allowed the central bank to cut interest rates, Fischer might be more cautious this time and leave interest rates unchanged.
"The central bank still has time to lower interest rates over the next few months to bring inflation back into the lower end of the government's price target range of 1% to 3% by the end of the year," said Sapir.
Israel's interest rate fell below the equivalent US Federal Reserve rate at the end of 2006, during which time the differential widened by 75 basis points. "The wider the differential the lower the yields for investors in Israel, which Fischer will take into account," Sapir noted.
Over the past three months, the Bank of Israel rate cuts have added up to one percentage point including a 50 basis-point reduction at the end of December. Still, Excellence Nessuah noted that since the beginning of the year, the shekel has appreciated by 0.57% against the basket of currencies and 0.14% against the dollar. Analysts at Excellence Nessuah expect the central bank to cut the base lending rate by a quarter percentage point Monday night, while the dollar is expected to trade between NIS 4.23 and NIS 4.25 to the dollar.
Over the past week, the dollar gained 0.1% against the shekel trading between NIS 4.21 and NIS 4.24, in anticipation of an interest rate cut tonight.
"The answer to the question, whether the dollar exchange rate will continue to strengthen or fall back depends on the decision by the Bank of Israel," said analysts at Gift Asset Management. "In principle, the conditions are there for an interest rate cut of 0.25 of a point as the shekel remained strong and the inflation environment is low."
On the other hand, similar to Sapir at PKN Plus, analysts at Gift remarked that Fischer could just as well be more cautious and halt interest rates for another month following last month's cut.
"Looking ahead, there is not much room for the Bank of Israel for additional interest rate cuts given that the US interest rate is expected to remain steady at 5.25% over the next few months," Gift analysts explained. "Thus the Bank of Israel might prefer to wait this time to see how the conclusions of the Winograd Committee and the changes in the government affect the stability of the government and market confidence."
If the central bank decides to lower interest rates by a quarter-point, analysts at Gift expect the dollar to trade at NIS 4.23-4.27. If the rate is unchanged this time, they forecast the dollar to trade at NIS 4.20-4.24.