Israeli Shekel Strengthens as Central Bank Holds Base Rate

The shekel headed for the biggest gain in almost three weeks after the Bank of Israel kept the base lending rate at a record low 0.1 percent.

The shekel strengthened 0.5 percent, the most since May 6 on a closing basis, to 3.8673 per dollar at 5:32 p.m. in Tel Aviv, and is the best performer among an expanded list of 31 major currencies tracked by Bloomberg. The yield on the 3.75 percent benchmark bonds due March 2024 fell two basis points to 1.75 percent and the benchmark TA-25 stock index declined 0.5 percent, the most in nearly two weeks.

Improved inflation data in March and April, and signs of an economic pickup, including a declining unemployment rate, were some of the main considerations underlying the decision, the central bank said in an e-mailed statement. Seventeen of 22 analysts surveyed by Bloomberg forecast the monetary policy panel led by Governor Karnit Flug would hold borrowing costs. The remaining five predicted a rate cut to zero. The central bank last cut rates in February.

A slight improvement to inflation data last month offered an excuse to hold rates, Kasper Lund-Jensen, a London-based analyst at Goldman Sachs Group Inc., said in an e-mailed note before Monday’s rate decision. Lund-Jensen sees Flug cutting the benchmark to zero “in the coming months.”

While the shekel declined as much as 3 percent against a basket of currencies since the previous rate cut in February, it has since gained back most of the loss. The strength of the shekel, along with persistently weak global trade, has clobbered exports, which account for a third of the country’s $280 billion economy. Exports of seasonally-adjusted goods dropped 4.3 percent in April, the sixth consecutive monthly decline.

The TA-25 index declined after the rate cut and following a slide in European stocks as holidays across the region curbed trading volume.

“There were some hopes that the central bank would cut rates so there is some disappointment,” Saar Golan a trader at Tel Aviv- based Bank of Jerusalem says by phone. “The index is also following a decline in the global markets.”

Israel’s economy grew 2.8 percent last year, the slowest annual pace since 2009. The consumer price index fell 0.5 percent from a year earlier in April, and has posted annual declines every month since September.

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