Israeli Shekel `Somewhat Overvalued' Against Euro, Flug Says

  • Central bank governor says economy doing `reasonably well'
  • Benchmark interest rate to remain low for `quite a while'

The shekel is “somewhat overvalued” against the euro, leaving Israeli exporters at a disadvantage in key European markets, the country’s central bank governor said Wednesday.

“There is a wide range of models that show different deviations from an equilibrium level of an exchange rate but all of them, or most of them, point to some over-valuation,” Karnit Flug said at a briefing for foreign journalists in Jerusalem.

While the Israeli economy is doing “reasonably well,” the slowdown in global trade, as well as the strong shekel, has weighed on Israeli growth, Flug said. The shekel’s value is one of the factors the central bank considers when setting the benchmark interest rate, which is expected to remain low for “quite a while,” she said.

Diverging monetary trends in Israel’s major trading partners, the U.S. and Europe, put the country in a relatively “unique” position because its policy isn’t coordinated with either one, Flug said at the end of December. The Federal Reserve raised rates that month for the first time in a decade, while the European Central Bank cut its deposit rate.

“Given that we’re not part of any bloc, we will have to wait and see what is the dominant effect before we decide in which direction our policy will move,” Flug said. “It’s hard to say at the moment what will be the dominant effect.”

The Bank of Israel has kept the benchmark rate at 0.1 percent since March, while buying foreign currency to help weaken the shekel. Still, the currency has strengthened by about 3 percent against the euro in the past 12 months, while losing about 0.8 percent against the dollar.