'Syria effect' and rate hike push shekel to 11-year high

Move comes on news about Syrian peace talks and expectations that the Bank of Israel will raise interest rates next week.

fifty shekels 88 (photo credit: )
fifty shekels 88
(photo credit: )
The shekel-dollar exchange rate fell to an 11-year low on Thursday on news about talks between Israel and Syria and expectations that the Bank of Israel will raise interest rates next week. On Thursday, the shekel-dollar representative exchange rate dropped by 0.7 percent, closing at NIS 3.33, from NIS 3.36 the day before. In inter-bank trading earlier in the day, the shekel-dollar exchange rate fell over 1% to NIS 3.31. Last Friday, the shekel-dollar rate plummeted by almost 2% in response to the unexpected 1.5% rise in the Consumer Price Index (CPI) in April. From the beginning of the year, the dollar fell 15% against the shekel - compared with a depreciation of 10% in all of 2007. Following the sharp rise in the CPI, the Governor of the Bank of Israel Prof. Stanley Fischer is now widely expected to raise the interest rate for June next Monday, to curb accelerating inflationary pressures. Analysts at Easy Forex said that an interest rate hike could strengthen the shekel against the greenback even further, forecasting that the breach of the NIS 3.40/$ level this week was a technical signal of further falls, which could mean the shekel will be headed for NIS 3/$. "The Bank of Israel has fallen into a shekel-inflation trap. On the one hand the shekel continues to strengthen, and on the other hand inflation is heading upwards," said Yaron Sar, head of research at Direct Investment House. "These are two serious problems demanding monetary measures - but in different directions." Sar added that despite the central bank's intervention into the foreign currency market, the shekel continued to appreciate against the dollar, weighing on exports and threatening to slow down the growth rate in the local economy, which in turn put pressure on Fischer to cut interest rates in recent months. "But the surprising 1.5% rise in the CPI index in April allowing inflation to flourish brought the bank's focus back on price stability and the country's financial stability, which can not be sacrificed to support growth," said Sar. "The governor needs to immediately tackle high inflation and cut interest rates by 0.5%. However, this is problematic because of the strength of the shekel, which is expected to continue to appreciate even without an interest rate hike. Fischer is therefore expected to raise interest rates by a mere 0.25% to 3.5% in a symbolic move signaling that he intends to tackle inflation." Michael Sarel, head of the economics and research division at Harel Finance, noted that the country's inflation rate in recent months was higher than those found in 26 out of the 30 member countries of the Organization of Economic Cooperation and Development (OECD). According to Harel Finance, inflation over the past 12 months until now has reached 4.7% - far above the government's price stability target of between 1% and 3%. Inflation is expected to reach a peak of 5% next month and remain over 4% for a long time before coming back into the inflation price target range over the course of the second half of 2009.