Even without legislation, Israelis are beginning to follow the behest of Governor of the Bank of Israel Prof. Stanley Fischer to stop denominating prices in dollars. Since January 2006, the shekel has appreciated more than 15% against the dollar.
The Bank of Israel welcomes the switch, noting the weakening of the pass-through between changes in the exchange rate and inflationary developments, which was very strong until recently. The proportion of rental leases denominated in dollars has fallen to 68% of all leases from 85% in January. This decline has intensified as the dollar weakened against other currencies, which has weakened the pass-through between changes in the shekel-dollar exchange rate and rising rent.
Economists note, however, that the weight of the dollar in the Consumer Price Index (CPI) is still very high because of the weight of the housing item in the CPI. They warn against premature joy in the weakening of the pass-through between the shekel-dollar exchange rate and inflation for two reasons: first, domestic prices are rising by an annualized 4.5%, well above the 3% ceiling of the inflation target, despite the dollar's weakness; and, even though the shekel has appreciated 10% against the dollar since January, housing prices and rent have risen sharply over the same period.
The economists say that new and renewed rental contracts are no longer linked to the dollar, and some are now denominated in shekels, but prices have risen by more than what would have been expected by the fall in the shekel-dollar exchange rate.
Published by Globes [online], Israel business news - www.globes-online.com - on December 11, 2007
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