Exporters slam 'dozing' Bank of Israel as shekel continues to rise

"The result will be a sharp decline in exports, including software exports. At the current conversion rates, there is no reason to export anything from Israel."

July 31, 2019 21:51
3 minute read.
A Isreal Shekel note and a U.S. Dollar note are seen in this June 22, 2017 illustration photo

A Isreal Shekel note and a U.S. Dollar note are seen in this June 22, 2017 illustration photo. (photo credit: THOMAS WHITE / REUTERS)

The Manufacturers Association launched a stinging attack on the “dozing” Bank of Israel on Wednesday as the Israeli shekel continues to dramatically strengthen against the US dollar and euro.

“All over the world, they fight for every shred of export and every production line, but the Bank of Israel [BoI] seems to be dozing and not taking any action to support exports,” said Shraga Brosh, president of the association, Israel’s largest industrial sector umbrella organization. “The result will be a sharp decline in exports, including software exports. At the current conversion rates, there is no reason to export anything from Israel.”

Ahead of an expected 0.25% interest rate cut by the US Federal Reserve for the first time since 2008, the shekel has strengthened significantly against the dollar. On Wednesday, the BoI set the representative dollar-exchange rate at NIS 3.499/$ – the strongest shekel since April 2018.

The shekel has also appreciated significantly against both the euro and the British pound, nearing an all-time exchange rate record against the euro at NIS 3.8997/€ and NIS 4.2583/£ against the pound after reaching a new 25-year high.

While the Bank of Israel has not raised its benchmark interest rate again since a surprising November 2018 hike to 0.25%, economists in the central bank’s research department have forecast that the interest rate could be increased again at the end of the third quarter of 2019.

Minutes from the last meeting of the bank’s monetary policy committee (MPC) in July showed one of the five-member committee voted in favor of an additional rate increase to 0.5%, while four voted for no change.

Yet, ahead of the Federal Reserve’s announcement, Bank of Israel governor Prof. Amir Yaron issued a rare statement that a further rate hike would be unlikely “for a long time.”

Responding immediately to the statement, further appreciation of the shekel witnessed during morning trading was wiped out.

“Since the [July] interest rate decision, there has been a sharp surprise in the inflation environment, with the June index falling 0.6%,” Yaron said.

“It has also been estimated that the major central banks will return to expansionary measures, and significant steps will be taken by the Federal Reserve in particular. This has had a significant impact on exchange rates, which is expected to affect inflation trends, too,” he added. “In light of these developments, I estimate that there will be no decision to raise interest rates for a long time. Moreover, if necessary, we have additional tools available.”

While the appreciation of the shekel might be welcome news for Israeli tourists and consumer purchasing power abroad, goods exporters are likely to experience reduced profits as foreign currency income drops in value.

“One of the big changes that we’ve seen this year is that the Federal Reserve, which most of the market was expecting to continue to raise rates, made a 180-degree turn due to fears of trade tensions, and economies and inflation slowing down,” Citi Israel chief executive and markets head Neil Corney told The Jerusalem Post. “This was after Israel had raised rates in expectation that the United States would continue raising rates. Generally, investors will look at the interest rate differential between the United States and Israel in order to decide long-term where they are going to invest.”

Given that a rate cut by the Bank of Israel is improbable, Corney added, the interest rate differential between the US and Israel will close, making the shekel more attractive to investors.

“The other part is just the continued long-term trend that we’ve seen for the past 10 to 15 years, where there has been more foreign money coming into the country – which has needed to be sold and seen shekels bought – than money going out of the country.”

A report published on Tuesday by Bank of America Merrill Lynch Global Research said that the Bank of Israel’s “hawkish rates guidance and sanguine approach” to the shekel leave the door open for further appreciation of the currency.

“The hawkish tone of the minutes of the 7-8 July MPC meeting surprises us, and will likely reinforce the ILS appreciation pressures for now. The minutes reveal that all the MPC members are in favor of tightening policy,” the report said. “During previous episodes of similar appreciation magnitude, the MPC under governor Karnit Flug frequently expressed concerns regarding exports and the tradable sector in the press statement... Governor Yaron frequently indicates that the BoI prefers market forces to determine the exchange rate.”

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