As shekel gains on dollar, Fischer urged to drop interest rate

Strong shekel increases pressure for lower rates.

October 9, 2006 09:01
2 minute read.
stanley fischer profile 88 298

stanley fischer profile . (photo credit: Ariel Jerozolimski)


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Calls for Bank of Israel Governor Stanley Fischer to reduce the interest rate at the end of the month are gathering momentum, as the shekel hovers near a five-year high against the dollar. The dollar closed at NIS 4.2465 Friday, reflecting the shekel's highest value against the greenback since late 2001. "The central bank must take into account the dollar's [continued] weakening and above all the damage to the industry and export sectors. So there is currently pressure to lower the interest rate to prevent further weakening of the dollar against the shekel," said Tandem Capital's Aaron Leitner. Forum Group CEO Ami Segal, however, suggested that Fischer likely would hold the interest rate at its current level, and that this would actually weaken the shekel somewhat against the dollar. His expectation for status quo was based on reports Sunday that Fischer denied speculation that he intended to lower the interest rate. The Bank of Israel told The Jerusalem Post Sunday that Fischer had not made any statement whatsoever on what he would decide for November. In any event, Gift currency analysts argued that it was "doubtful that lowering the interest rate by 0.25% alone would constitute a major factor in halting the appreciation of the shekel, when [expectations of such a drop] are already half-expressed [in the market's behavior]." "On the other hand, if the Bank of Israel decides not to lower the interest rate, the shekel is liable to get even stronger. It appears that halting the shekel depends more on the timing in which the speculative players decide that the time has arrived to realize profits," they said, adding that many analysts suspect that once the shekel rises to NIS 4.20 to the dollar, the speculators will cash in. The Gift analysts noted that the shekel had "succeeded in recent weeks to cut itself off from almost all external influences, such as the dollar's value globally and the condition of developing markets, and even political and security threats standing before the Israeli economy. As a result, the return to reality is liable to be difficult." Yoram Gershoni of Green Bull Investments Management said he "believes the Bank of Israel" and "does not see any reason to bring down the interest rate, which would lead to equality between the dollar and shekel interest rates, and this in itself would be a historic event." Harel Group Insurance and Finances analysts said the US Federal Reserve also could begin dropping its interest rate soon, though domestic weakening in the labor and housing markets, the dropping oil and fuel prices and "especially" the shekel's strengthening against world currencies, would likely cause the Bank of Israel to lower the interest rate before the Fed, however, Harel said. The shekel is likely to see a "moderate" drop against the dollar if the Bank of Israel lowers the interest rate or if the market expects the central bank to do so, Harel said.

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