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Shekel Drops For Second Day as Bank Holds Interest Rates

The shekel fell for a second day after the Bank of Israel left interest rates unchanged, damping demand for the currency as signs of a weakening global economy threaten to slow growth.

Bank of Israel Governor Stanley Fischer held the benchmark lending rate at 3.25 percent, the central bank said yesterday after 10 increases in two years. All 24 economists surveyed by Bloomberg forecast the decision. The bank cited concern about slower U.S. economic growth and worsening debt risks in Europe.

“Following the halt in interest rates, investors’ demand for the shekel, which is spurred by a widening interest-rate differential with the U.S., is a little reduced,” Eytan Admoni, head of the international department at Bank of Jerusalem Ltd., said by telephone.

The shekel weakened as much as 0.8 percent to 3.4675 against the dollar and was down 0.3 percent at 3.4535 at 4:30 p.m. in Tel Aviv. It was the worst performer today among the 10 most-active currencies in emerging Europe, the Middle East and Africa, according to Bloomberg data.

The yield on the benchmark Mimshal Shiklit bond due January 2020 gained one basis point, or 0.01 percentage point, to 5.11 percent at the 4:30 p.m. close in Tel Aviv.

Israel’s economic growth slowed to an annualized 4.8 percent in the first quarter from 7.6 percent the previous one, which was the fastest since 2006. Inflation accelerated to 4.1 percent in May, the fourth month at or above 4 percent. The government’s target range is 1 percent to 3 percent.

Higher Rates

The latest Bank of Israel survey showed that economists expect higher rates to eventually succeed in bringing inflation back inside the target range. The average forecast for inflation a year from now is 2.9 percent, the Bank of Israel said yesterday. Forecasters are predicting on average that the benchmark interest rate will be 4.3 percent by then.

The widening interest rate gap between Israel and other developed economies which have mostly kept borrowing costs near record lows has prompted the shekel’s appreciation.

Fischer has gradually raised the benchmark rate from a record low of 0.5 percent in August 2009, picking up the pace in the first three months of this year. The currency appreciated 12.4 percent against the dollar over the past year.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

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