'Only dramatic rate cut can avert shekel climb'

There is a consensus among analysts that the Bank of Israel next Monday will cut January's interest rate by only one-quarter of a percentage point.

December 19, 2006 07:42
1 minute read.


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Only an aggressive interest rate cut by the Bank of Israel next week could lead to a turning-point in the strength of the shekel and return support for the US dollar in Israel's foreign exchange market, strategists said. "The reasons for the continuing weakness of the US currency remain in force, which are mainly due to its retreat in world markets and the influx of foreign capital to Israel," said Norbert Brinker, president & CEO of GIFT Asset Management Ltd. "Only a dramatic interest rate cut by the Bank of Israel of at least half a percentage point could halt the downward trend of the US dollar in the local market." There is a consensus among analysts that the Bank of Israel next Monday will cut January's interest rate by only one-quarter of a percentage point, to 4.75 percent from 5%, especially following news of November's 0.2% drop in the consumer price index, marking the third month in a row of negative inflation. "In order to bring back the near-zero or negative inflation expectations for the months to come into the government's target range for inflation of between 1-3%, the Bank of Israel will be pressured to cut interest rates by at least a quarter percentage point," said Brinkner. The Manufacturers Association of Israel and the Federation of the Israeli Chambers of Commerce have been urging Bank of Israel Governor Stanley Fischer to make a cut of more than a quarter percentage point by the end of the month to maintain the competitiveness of Israeli exporters and reverse deflation. Last week, Fischer said the bank would reduce interest rates gradually on concern that any "drastic" reduction would cause inflation to overshoot the target. On Monday, the shekel depreciated slightly to a level of NIS 4.19 from the representative rate of NIS 4.17 at the end of last week, which marked the highest shekel-dollar rate in more than five years. "Our forecast is that the US dollar will continue to slide downwards on the assumption that foreign investors are not rushing to move their financial assets out of Israel and the flow of foreign investment into Israel is only set to grow," said Gilad Cohen, macroanalyst at Gaon Investment House. Gift and Gaon expect the shekel-dollar exchange rate to trade between NIS 4.15-4.20/$ in the short-term, changing the shekel support level to NIS 4.15/$ from NIS 4.20.

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