The shekel has weakened against the dollar, but strengthened against the euro in morning inter-bank trading today, the day after the Bank of Israel cut the interest rate for June. The shekel-dollar exchange rate has risen 0.25%, compared with yesterday's interest rate, to NIS 3.706/$, but the shekel-euro exchange rate has fallen 0.40% to NIS 4.779/€.
Yesterday, the Bank of Israel cut the interest rate for June by 25 basis points to 1.25%, just two week after an extraordinary mid-month rate cut and the announcement of a foreign currency purchase plan.
"We expect the dollar to continue to strengthen in view of the drop in the euro on Friday afternoon," says Agio Risk Management and Financial Decisions CEO Dr. Gideon Ben-Nun, "The Bank of Israel's interest rate cut and purchases plan are succeeding in weakening the shekel and clearing the market of speculators.With the interest rate decision for June, the governor has again cut the interest rate for the second time in two weeks.
"Such frequent reductions were made before during crises, in order to send the shekel-dollar exchange rate higher. The reason is dismal economic figures, which force the Bank of Israel to boost the shekel-dollar exchange rate to a more competitive level for domestic industry. We believe that fiscal and monetary policy, including taxation of capital movements and of speculative activity by foreigners in the capital market, will work together to weaken the shekel over the next six months. We expect that the shekel will return to at least its 'normal' level at around NIS 3.75/$, so long as there is no flare-up in the north."
Prico Risk Management and Investments CEO Yossi Fraiman comments, "The Bank of Israel's announcement about the reduction in the interest rate to 1.25% hits the worthwhileness of betting on interest rate differentials and helps drive players out of this arena. We believe that the interest rate cut should have a positive effect on the transfer of money to the Israeli and foreign capital markets. We believe that it would have been better had the Bank of Israel kept the interest rate weapon in reserve, and initially acted by buying foreign currency to flatten exchange rate volatility and help stabilize exchange rates above NIS 3.65/$. Government decisions, beginning with the 1% VAT hike, alongside the slowdown in global activity, hurt domestic economic activity, while the shekel's depreciation contributes to exporters' profitability and blocks a more lethal blow to Israeli exporters' terms of trade."
Published by Globes [online], Israel business news - www.globes-online.com - on May 28, 2013
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