Photographer: Ariel Jerozolimski/Bloomberg

Strong Shekel Will Delay Return to Inflation Goal, BOI Says

Updated on
  • Israel central bank official Andrew Abir comments in interview
  • Inflation target is 1%-3%; prices rose 0.1% in January

The shekel’s recent rally means it will likely take longer for Israel’s inflation rate to reach the target range, according to a senior official at the central bank.

The shekel gained 3.5 percent against the dollar in February, the second-biggest gain in an expanded basket of major currencies tracked by Bloomberg, after Israel’s economy unexpectedly grew 6.2 percent in the fourth quarter.

The Bank of Israel has been trying to slow the advance of the shekel, which is trading near its highest level since 2014 and hurting exporters whose overseas sales account for about a third of gross domestic product. It lowered the benchmark interest rate to a record low 0.1 percent in 2015 to boost inflation and rein in the currency, and held it there for a 25th month in February.

“All other things equal, the appreciation we’ve seen will affect inflation, and will further postpone the time it will take for inflation to return to the 1 percent to 3 percent target,” Andrew Abir, director of markets operations at the Bank of Israel, said in a phone interview. The inflation rate turned positive for the first time since 2014 in January, rising 0.1 percent on an annual basis.

Abir said financial markets had taken an overly optimistic view of the recent GDP data, which was driven by a one-time increase in automobile imports in December. Excluding that, the bank estimates that growth was just over 3 percent, he said.

“We have for some time been of the view that the shekel is notably overvalued, and that this overvaluation has an adverse effect on our tradeable sector,” he said. “Of course, as the shekel appreciated further, it is now more overvalued than it was before.”

Abir’s department has overseen the bank’s dollar-buying program to weaken the shekel, with reserves rising to a record $102 billion in February. The currency strengthened 0.4 percent to 3.6610 per dollar at 3:29 p.m. in Tel Aviv after gaining earlier as much as 0.7 percent.

(Adds currency move in last paragraph.)
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