Shekel Rises to 2-Week High on Global Stimulus Bets, Bonds Gain

The shekel strengthened to the highest level in almost two weeks as investors bet Israel will keep interest rates on hold this month amid optimism global central banks will take steps to support growth.

The shekel rose 0.1 percent to 4.0088 a dollar at 4:35 p.m. in Tel Aviv as the greenback fell against nine of 16 major currencies tracked by Bloomberg. It earlier reached 3.9921, the strongest since Aug. 10. The two-year break-even rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, added four basis points to 267, implying an average annual inflation rate of 2.67 percent.

Minutes from the U.S. Federal Open Market Committee’s July 31-Aug. 1 meeting showed members judged that more stimulus “would likely be warranted fairly soon.” About 40 percent of Israel’s gross domestic product is made up of exports, with the U.S. among the largest markets. The central bank will hold interest rates at 2.25 percent on Aug. 27, according to 16 out of 19 economists in a Bloomberg survey.

“The Bank of Israel is likely to save its ammunition and leave rates unchanged at month-end amid positive sentiment driven by expectations that global policy makers are taking measures to boost economic growth,” said Eytan Admoni, head of the international department at Bank of Jerusalem Ltd. “Rising prices in food and other costs are also reducing the likelihood borrowing costs will be lowered.”

Sentiment was also boosted after People’s Bank of China Governor Zhou Xiaochuan said adjustments to interest rates and banks’ reserve requirements are still possible.

Bonds Advance

Three economists are forecasting a 25 basis-point reduction at this month’s rate meeting. The yield on the 5.5 percent bonds maturing in January 2022 fell one basis point, or 0.01 percentage point, to 4.13 percent at the close in Tel Aviv. The yield has gained 19 basis points this month.

Parliament this month approved raising value-added and income taxes, while the Finance Ministry in July increased taxes on beer and cigarettes. Food costs, including dairy, poultry and egg prices, are expected to climb by year-end, Israel’s Ministry of Agriculture said Aug. 15. Inflation accelerated to 1.4 percent in July from 1 percent the month earlier as housing costs and taxes increased, the Central Bureau of Statistics said Aug. 15.

One-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, fell two basis points to 2.04 percent. The swaps rose eight basis points this month. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, declined 0.2 percent to 266.93.

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