Israel's Shekel Strengthens After Flug Holds Rate at Record Low

Israel’s currency appreciated the most in two weeks after the central bank maintained the base lending rate at a record low 0.1 percent for a seventh straight month.

The shekel traded 0.8 percent higher, the sharpest rise since Sept. 8, at 3.9169 per dollar at 4:10 p.m. in Tel Aviv, and was the best performer among 31 major peers tracked by Bloomberg. The yield on government notes due August 2025 fell 5 basis points to 2.18 percent, the lowest since Aug. 31. The TA-25 Index of shares declined 2.7 percent to 1,537.15, headed for a correction.

The Bank of Israel’s five-member monetary panel, led by Governor Karnit Flug, kept the benchmark rate at 0.1 percent citing a decline in the consumer price index, negative inflation and moderate economic growth. Fifteen of seventeen economists surveyed by Bloomberg correctly forecast the decision.

“The dollar/shekel market priced-in very high expectations for a rate cut, much higher than that derived from the bond market,” Yonie Fanning, chief economist at ILS Brokers Ltd. in Tel Aviv, said by e-mail before the announcement. “Inflation is still bound to drop to a decade-low in the next two months, so it seems that a cut is also inevitable.”

The central bank has cut interest rates 13 times since 2011 to tame shekel gains and boost exports, which account for about a third of Israel’s $304 billion economy.

Investors increased their bets for another reduction after the bank curbed its inflation forecast for the coming 12 months and the government lowered its forecast for economic expansion this year and the next. Israel’s one-year swap rate, an indicator of where traders see borrowing costs in the period, climbed 1.5 basis points to 0.065 percent, after heading toward a record low before the decision.

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