- Central bank keeps interest rates unchanged as growth slows
- Currency trades at lowest since March on a closing basis
Israel’s shekel weakened as investors fretted about divisions in the country’s largest trading partner after the U.K. voted to leave the European Union.
The shekel dropped 0.3 percent to 3.8921 per dollar as of 4:38 p.m. in Tel Aviv, after depreciating the most in five years on Friday in the wake of the British referendum. The Bank of Israel on Monday left interest rates at a record low. While all 17 analysts in a Bloomberg survey forecast the decision, shekel forward-rate agreements dropped after Britain’s vote, signaling some traders are expecting a cut in the next three months.
Economic disruption in the EU and any subsequent slowdown in global growth threatens to put further pressure on Israel’s $296 billion economy, which posted the slowest first-quarter growth since 2009 this year. The Bank of Israel has kept benchmark borrowing costs at 0.1 percent for more than a year in a bid to stem shekel gains, boost exports and spur growth.
“The fallout from Brexit for the global economy is likely to hit small, open economies like Israel’s in which exports are a key component of GDP,” said Modi Shafrir, the chief strategist at Mizrahi Tefahot Bank Ltd. in Ramat Gan, Israel. If market upheavals continue, Brexit increases the likelihood of additional policy measures, Shafrir said.
‘Significant Trading Partner’
Bank of Israel Governor Karnit Flug said that volatility remained high, and it was still difficult to know what the final short-term effects of the referendum will be on the financial markets, adding that the impact in Israel is expected to be moderate.
“We can hope that the various arrangements that will be formulated, including between the U.K. and Israel, will prevent a negative impact to trade beyond what may take place as a result of the weakening of the pound sterling should that persist,” Flug said at a press conference in Jerusalem following the rate announcement. “Britain is a significant trading partner for the Israeli economy, and it is important to maintain the economic ties between our two countries.”
The central bank’s research department cut the growth forecast for the country’s economy for this year to 2.4 percent from a previous estimate in March of 2.8 percent. For 2017, the bank expects the economy to expand by 2.9 percent, down from its previous estimate of 3 percent.
Israel’s Securities Authority Chairman Shmuel Hauser on Monday told investors there was “no need to panic” following the Brexit decision. Meanwhile Finance Minister Moshe Kahlon said Sunday the government has set up a situation room together with the central bank to monitor developments. Shekel forward-rate agreements for three months, which are used to speculate on rate moves, fell the most since February 2015 on Friday and extended the drop to 0.045 percent on Monday.