Israeli Shekel Gains as Bank Deflation Comment Falls Short

  • Traders had bet Flug would do more to fight deflation risk
  • Monetary committee says policy will remain `accommodative'

Israel’s shekel strengthened after the central bank refrained from using unconventional tools to boost consumer prices, while keeping interest rates on hold for the 11th straight month, the longest streak in at least 21 years.

The currency appreciated 0.3 percent, the most in more than two weeks, to 3.9697 per dollar at 2:53 p.m in New York. It has lost 2 percent this year, the biggest drop among 12 Middle Eastern currencies.

The four-member monetary policy panel, led by Governor Karnit Flug, kept the base lending rate at a record low of 0.1 percent, a move anticipated by all 21 analysts surveyed by Bloomberg. The bank also noted that “risks to achieving the inflation target have increased, and the risks to growth remain high.”

The shekel’s strength may be temporary because Flug left the door open for stimulus as the central bank combats the risk of deflation, said Win Thin, global head of emerging markets strategy at Brown Brothers Harriman & Co. in New York.

“They were fairly dovish, but the price action suggests a little bit of disappointment,” Thin said by phone. “Deflation is persistent, inflation expectations are collapsing. They’re going to make the case for potential easing down the road, and that should weigh on the shekel.”

Inflation Target

Analysts have been cutting their shekel forecast since the start of the year. The median estimate for the first quarter of 2016 is 3.95 per dollar, according to a Bloomberg survey of 21 forecasters. Analysts expect the shekel to weaken to 4.02 by the third quarter, and to trade at 4.00 by the end of the year.

The Israeli government this month introduced new measures to reduce the cost of living, such as cutting water and transportation prices, challenging the Bank of Israel’s mandate to keep inflation between 1 percent and 3 percent. The rate hasn’t been near the range in almost two years.

Consumer prices are expected to rise 0.3 percent this year, according to a Bank of Israel survey of economists on Jan. 19, down from 0.6 percent in a previous poll.

The shekel’s strength is adding to the concern. The currency is the only one among 31 major peers to have appreciated against the dollar in the past 12 months.

Unchanged Rate

Inflation-adjusted exchange rates against Israel’s major trading partners rose 7 percent last year, the second-most expensive currency in the Middle East and Africa, according to data compiled by the Bank for International Settlements.

“The domestic inflation environment actually supports lowering the interest rate even more,” Modi Shafrir, chief strategist at Mizrahi Tefahot Bank Ltd. in Ramat Gan, said by phone before the announcement. “But Flug made it clear that another rate cut would be considered unconventional, and will only occur under ‘unusual circumstances.’ Therefore, we see interest rates remaining unchanged over the coming year.”

Policy makers have lowered borrowing costs 13 times since 2011 to stem the currency’s appreciation and revive growth. Israel’s economy derives about a third of its earnings from exports and in 2015 expanded at its slowest pace in six years.

The yield on the benchmark 2025 government bond fell one basis point to 1.94 percent, while the TA-25 Index of stocks declined 0.8 percent.

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