July inflation reading weakens shekel

Shekels Photo: Shutterstock
Shekels Photo: Shutterstock

The capital market now sees the Bank of Israel's interest rate remaining low well into 2018. 

As soon as the Consumer Price Index (CPI) reading for July was released yesterday afternoon, the shekel-dollar exchange rate started to climb, crossing the NIS 3.60/$ threshold. The rate has continued to rise this morning, and is currently at NIS 3.6151/$, 0.73% above yesterday's representative rate. The shekel-euro rate is also up, by 0.59%, at NIS 4.24/€.

The CPI unexpectedly fell 0.1% in July, and the inflation figure for the twelve months to July is minus 0.7%. It now looks unlikely that the inflation rate in the second half of this year will bring the rate close to the market's expectation of up to 0.8%, leading investors to conclude that the Bank of Israel will not raise interest rates in the coming year.

The dollar has strengthened on world markets, thanks to reports of the start of diplomatic contacts between the US and North Korea, after the exchanges of threats in recent weeks.

Yossi Levy, CEO of More Investment House said yesterday, "The negative inflation rate continues to permeate capital market estimates concerning the Bank of Israel's interest rate, with an assumption that it will remain low for some time to come, deep into 2018. As a consequence, the interest rate gap between the shekel and the dollar could widen, and that will continued to put upward pressure on the shekel-dollar rate at least until the beginning of 2018. We have seen less intervention from the Bank of Israel in the foreign exchange market, since market forces are in any driving a weakening of the shekel against the US dollar.

"We now see the shekel-dollar rate, which touched a low of NIS 3.5/$, at around NIS 3.61/$, and it will continue to its previous support level of NIS 3.73/$.

As far as the bond market is concerned, index-linked bonds have been weak recently, as the 0.5-0.8% inflation projections of the financial institutions have proved off the mark, and it now looks as though annual inflation for 2016 will be about zero."

Published by Globes [online], Israel business news - www.globes-online.com - on August 16, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

Shekels Photo: Shutterstock
Shekels Photo: Shutterstock
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