Shekel gains expected to continue

Economists forecast that inflation for 2007 would reach 2.3% on the basis of an average shekel/dollar exchange rate of 4.05.

September 17, 2007 08:27
2 minute read.
shekel graf 88 224

shekel graf 88 224. (photo credit: )


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The shekel is expected to continue its rally as the dollar, putting pressure on the Bank of Israel keep interest rates on hold, analysts said Sunday. "Over the past month we have seen the shekel starting to strengthen as the US currency weakened on the back of the rising probability that the US Federal Reserve would cut interest rates, while at the same time the Bank of Israel could raise interest rates by the end of the month," said Yaniv Hevron at Psagot Ofek Investment House. "The stronger shekel is leading inflation into the higher mid-range of the government's price target of between 1 percent and 3% and, therefore, there is no reason for the central bank to raise interest rates by the end of the month." Over the past week, the dollar weakened against the shekel to a level of 4.09 as the dollar dropped to a near record low of $1.38 against the euro last week as concerns about a US economic slowdown continuing to weigh on the beleaguered currency. With the shekel/dollar exchange rate remaining on an average level of NIS 4.1 over the next few months, inflation for the end of 2007 was expected to reach 2.8%, according to Hevron, while on an average exchange rate level of NIS 4, inflation was expected to be 2.2%. "We expect the dollar to continue to weaken and the shekel to strengthen in response to not just the monetary action of the US Fed but to further weak economic data," said Hevron. "I wouldn't be surprised if the shekel/dollar exchange rate would drop below the psychological barrier of NIS 4." Similarly, economists at Leader Capital Markets predicted that with the US Fed expected to cut interest rates on Tuesday by at least 0.25 of a percentage point, coupled with a global economic slowdown and the shekel moving stronger, Israel's central bank could be expected to put interest rates on hold over the next three to six months. "The strength of the shekel against the dollar over the past month is a correction of the sharp weakening of the local currency in previous months due to the short-term turbulence in financial markets," said economists at Leader. "Other factors that are expected to support the shekel are strong macroeconomic fundamentals and a high current account surplus." Economists at Leader Capital Markets forecast that inflation for 2007 would reach 2.3% on the basis of an average shekel/dollar exchange rate of 4.05. Meanwhile, Serhan Cevik at Morgan Stanley maintained his view that it would still make sense for the Bank of Israel to tighten the policy further. "The adjustment in electricity tariffs [the 8.42% rise that will go into effect on Tuesday] is going to push inflation even higher. Although the shekel's strength in recent weeks has curbed curbed inflation pressures, the underlying trend is already above the central bank's target range and is moving higher." Looking ahead economists expected inflation in the 12 coming months to be in the range of 1.2% and 1.5%. Last week, the Central Bureau of Statistics reported that consumer prices in August rose 1% from a year ago, the biggest annual gain since last September.

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