Shekel Weakens as Bank of Israel Keeps Rates Unchanged

  • Best performer this year against dollar among major currencies
  • Israeli consumer prices have fallen for 15 straight months

Israel’s shekel stayed lower against the dollar after the Bank of Israel kept interest rates on hold for the 10th straight month.

The currency slipped 0.1 percent to 3.8784 per dollar at 5:39 p.m. in Tel Aviv. Government bonds rose and Israeli stocks declined. All of 19 analysts surveyed by Bloomberg accurately forecast the central bank would keep its base lending rate at a record-low 0.1 percent as Governor Karnit Flug seeks to shore up growth and inflation.

Israel’s shekel has risen 0.5 percent against the dollar this year, the most among 31 major currencies tracked by Bloomberg. The relative strength has complicated efforts to tackle consumer prices that have fallen for 15 straight months, compared with a central bank target inflation band of 1 percent to 3 percent inflation. The Bank of Israel said on Monday that “the risks to achieving the inflation target have increased.”

“The Bank of Israel wants to keep borrowing costs low as it’s facing a strong shekel and low inflation,” Alex Zabezhinsky, the chief economist at Bnei Brak, Israel-based Meitav DS Investment House Ltd., said by phone before the decision. “We see interest rates remaining low in coming months as consumer prices are not expected to pick up so quickly.”

Inflation Outlook

Rate-setters have lowered benchmark borrowing costs 13 times since 2011 to stem the currency’s appreciation and revive growth in an economy that derives a third of its earnings from exports and is forecast this year to grow at the slowest pace in six years.

Consumer prices are expected to rise 0.5 percent in the next 12 months, according to a Bank of Israel survey of economists on Dec. 20, down from 0.7 percent in a previous poll.

Speaking to reporters in Jerusalem after the decision, Flug cited the “low” inflation environment, “moderate” growth and monetary stimulus worldwide as reasons to justify a continuation of accommodative monetary policy.

Benchmark government bonds due in 2025 gained 0.13 agora on the shekel to 97.86 agorot, pushing the yield down two basis points to 2.06 percent at the close. The TA-25 Index of equities declined 0.6 percent, the most since Dec. 22. Interest-rate swaps, an indicator of where traders see borrowing costs over the next 12 months, slipped by 0.5 basis point to 0.145 percent.

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