BoI keeps rates unchanged, shekel on worst streak since 1984

Bank of Israel keeps rates unchanged, Shekel touches 4.06 against the dollar

Israel's currency and bonds continued to decline even as the Bank of Israel maintained its policy interest rate on Monday, with investors concerned about the potential escalation of the conflict with Hamas and its impact on the economy.

The New Israeli Shekel fell by as much as 0.2% to 4.0649 per dollar, marking its 11th consecutive day of losses — the longest such streak since 1984.

The Bank of Israel's decision to keep the benchmark rate at 4.75% aligned with the forecasts of nearly all economists surveyed by Bloomberg, as indicated in a Monday report. This decision is part of efforts by policymakers to safeguard the value of the country's assets, which includes a $45 billion market intervention program. Despite projections of the conflict remaining contained, updated projections from the Bank of Israel's research department indicate slower economic growth for this year and the next.

Hasnain Malik, a Dubai-based strategist at emerging markets research firm Tellimer, told Bloomberg on Monday:

“There is a catch-22 on policy rates. The real interest rate is positive [at] 1% and the war is going to hurt growth, but the war is driving currency weakness. Holding rates steady is a response to that.

Ultimately, the progress of the war and how wide are the domestic political splits as and when the war ends matter much more than rate decisions for Israeli asset prices”.

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Israel interest rate: BoI keeps rates unchanged, growth estimate trimmed

Bank of Israel Governor Amir Yaron, who recently said he would remain in his post to steer the economy in wartime, told a news conference on Monday that he expected Israel’s economy to quickly recover from the current conflict.

"Israel's risk premium went up ... we want first and foremost to ensure that the financial systems are working," Yaron said. "We want to stabilize the financial side because certainly if there are problems there, there will be even bigger problems on the real (economy) side."

Rather than cut rates, Yaron said the central bank was taking steps that act like monetary easing, such as working with banks to allow those impacted by the conflict to defer or freeze loan repayments.

"Only when we get to recovery (after the war) can we think what to do on the interest rate side," he said. "For now, uncertainty is very high."

The Bank of Israel’s staff anticipates that the key interest rate will decrease to a range of 4.0% to 4.25% in the upcoming year.

Since the incursion by Palestinian militant group Hamas into southern Israel on October 7, the bank has revised its growth projections for Israel’s economy. The growth estimate for 2023 has been reduced from 3.0% to 2.3%, and for the following year, it has been adjusted from 3.0% to 2.8%.

These forecasts assume that the conflict will remain concentrated in the southern region near the Gaza border during the remainder of 2023. However, the duration of the conflict, as well as potential developments that could extend to involve Hezbollah on the Lebanese border or other areas, could significantly alter these estimates, according to Yaron.

Shekel forecast: Bearish bets on shekel mount as Israel holds off ground invasion of Gaza

Bearish bets on the shekel have mounted in recent weeks, with Deutsche Bank noting last week that short positions against the Israeli currency reached “extreme levels.”

As per a Bloomberg report on Monday, the premium for protecting against shekel declines over one month, compared to hedging against its gains, rose to 1.6% on Monday, reaching the highest level since August, risk reversals showed.

To prevent further shekel depreciation and provide market liquidity, the Bank of Israel announced a plan to sell up to $30 billion in forex and said it would offer dollar liquidity to the market through SWAP mechanisms of as much as $15 billion. SWAP mechanisms are a type of futures contract where two parties exchange cash flows or liabilities from two distinct financial instruments.

Since the start of the war, the shekel has shed close to 5% of its value against the U.S. dollar and is down 15.15% so far in 2023.

At the time of writing, the USDILS exchange rate stood at 4.0585, as per MarketWatch data.

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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.