Excellence chief economist Shlomo Maoz: Entire industries will be wiped out.
The shekel strengthened against the dollar but weakened against the euro in morning inter-bank trading today. After the shekel-dollar exchange rate fell 2.5% last week to a one-month low, the exchange rate fell a further 0.54% in morning trading today to NIS 3.369/$ - the lowest rate since the exchange rate reached NIS 3.344/$ on July 16, 2008.
The shekel weakened against the euro on reports of a new bailout package for Greece. The shekel-euro exchange rate rose 0.52% to NIS 4.933/€.
Talking to "Globes", Shlomo Maoz, chief economist of Excellence Nessuah, attacked the Bank of Israel for its last interest rate hike, by 0.25% to 3.25%, arguing that this was the reason for the appreciation of the shekel, and that it would lead to severe damage to the economy.
"Since the Bank of Israel's mistaken decision to raise interest rates on May 23, the shekel has appreciated by 2% against the effective currency basket of 28 currencies of Israel's trading partners," says Maoz. "As I have said before, this decision was hasty and wrong, in the light of the low interest rates in Western countries, the crisis in Europe, the economic slowdown in the US, and the fear of a crisis in China. Other countries also have high inflation rates, as in Europe and Britain, and despite that they have not raised interest rates there. Although strong activity in the Israeli economy has led to inflation, this inflation is mainly in housing; raising interest rates cannot by itself stem the rise in the cost of housing, but only administrative measures such as those proposed by the Ministry of Finance."
But Governor of the Bank of Israel Stanley Fischer said recently that exports continue to grow and there is no substantial damage.
"Raising the interest rate and deciding that the currency appreciation is for the time being not affecting exports, which continue to grow, is like the man who fed his horse three times a day at first, then twice a week, and then once a week, until the horse died. There is damage to the competitiveness of the economy, and appreciation of 2% over such a short period will cause harm."
Can Fischer afford not to raise interest rates, given the real estate bubble?
"Housing prices are no longer rising in central Israel. Interest rates have risen to 3.25% and now we have to stop, and take a breather. The economic slowdown in the US does not allow a rate hike at least until the second quarter of 2012. Any further increase in interest rates will cause further appreciation of the shekel. "
Where will the shekel-dollar rate get to at this rate?
"My forecast is for 3.28 shekels to the dollar this summer. In my view, the Bank of Israel has realized its error, and will not raise interest rates next month. It will lick its wounds, and return to intervention in the foreign exchange market, although the effect of intervention is weakening, because the interest rate differential between Israel and the US stands at 340 basis points on Treasury bonds. Entire industries will be wiped out in Israel because of this interest rate differential. Any factory that leaves will not come back. "
"It seems that the interest rate hike two weeks ago (which continued the trend of recent months) combined with the especially optimistic growth forecasts published this week have resulted in the shekel-dollar rate having few alternatives but to weaken," says Bank of Jerusalem foreign currency department manager Eitan Admoni. "The dollar is also suffering from difficulties and weakness in international markets. We believe that the dollar will continue to weaken this week and in the coming weeks, and we see no substantial correction on the horizon, at least not on the economic side. We expect the shekel-dollar exchange rate to be NIS 3.323-3.382/$ this week."
In international markets, the dollar has weakened 0.002% against the euro to $1.464/€, but it has strengthened 0.105% against the Japanese yen to ¥80.33/$.
This week's foreign currency trading is taking place against the disappointing US job figures for May released on Friday, which indicate weakness in the US labor market.
Published by Globes [online], Israel business news - www.globes-online.com - on June 6, 2011
© Copyright of Globes Publisher Itonut (1983) Ltd. 2011
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