Governor Karnit Flug signaled that the Bank of Israel is unlikely to take unconventional measures to spur inflation, driving the shekel up to the highest level in eight months.
Stocks and bonds declined as the central bank said on Monday that consumer-price expectations showed inflation may rebound to the official target range of 1 percent to 3 percent. The bank’s Monetary Policy Committee kept the benchmark base rate on hold at a record low of 0.1 percent.
“It appears that the probability that we will be required to use unconventional tools in the near future has declined,” Flug said. “However, the economic world is one of unexpected shocks, and the well known expression ‘never say never’ is still relevant.”
The Bank of Israel has reduced its benchmark rate 13 times since 2011 to weaken the shekel and shore up exports, which account for about a third of Israel’s $280 billion economy. The bank’s research department said it expects the benchmark rate to start increasing gradually next year.
Ori Greenfeld, chief economist at Psagot Investment House Ltd. in Tel Aviv, called Flug’s comments on unconventional tools the bank’s “key sentence.”
“That sentence, together with forecasts of a rate rise that will parallel what’s expected in the U.S., led to the sharp drops in the bond and foreign exchange markets,” he said by e-mail.
While downplaying the likelihood of unconventional measures, Flug also expressed concern over the lack of export growth, and said the shekel is overvalued.
“We are not indifferent to the exchange rate,” she said. “We think there has been excess appreciation to some degree.”
The shekel advanced as much as 1.6 percent and closed at 3.7739 a dollar on Monday. The currency weakened 0.4 percent to 3.7871 a dollar at 8:55 a.m. in Tel Aviv.
The TA-25 stock index reversed gains and dropped 0.4 percent at the close. Benchmark government bonds fell, pushing the yield up 18 basis points, the most since Dec. 23.
“Investors understand Flug has taken extreme measures on the dollar-shekel off the table,” Rony Gitlin, the head of spot trading at Tel Aviv-based Bank Leumi Le-Israel Ltd., said by phone. Previously, “the central bank had convinced investors to follow its lead to weaken the shekel.”
(An earlier version of the story corrected the scope of the shekel’s move.)