Israeli Shekel Weakens Against Dollar After Interest Rate Cut

The Israeli shekel experienced another decline, losing over 1% against the US dollar the day after the Bank of Israel lowered its benchmark interest rate. This weakening of the shekel occurs amidst global market trends and follows a night of heightened tensions on the Iranian front, including mutual attacks and Iranian strikes on U.S. military bases in Jordan.

Domestically, the dollar rose by 0.4% to trade above 3.04 shekels, while the euro strengthened by a similar margin, trading around 3.52 shekels. Globally, the dollar index increased by 0.2% to 99.8 points, the euro fell by 0.2% to just over $1.15, and the British pound weakened by 0.2% to trade slightly below $1.35.

Einat Meir, Macroeconomics Department Manager at Discount Bank, expressed doubt about further imminent interest rate reductions. She explained that while moderating inflation prompted the recent cut, inflation is expected to gradually rise towards the target range in the coming months, reducing pressure for further cuts. Meir also noted that the narrowing gap between current GDP and its long-term growth trend, reflecting a quicker-than-expected recovery from the war's impact, allows the Bank of Israel to avoid rushing into another rate reduction. Political timing is also a factor, with the bank likely to avoid cuts close to elections.

Roi Kadosh, Chief Investment Officer at Hachshara Insurance and Finance, described the interest rate decision as brave, driven by declining inflation and stable price expectations. He believes the move aims to provide relief to borrowers, ease credit crunch, and stimulate economic growth. However, Kadosh highlighted the challenges, including rising global government bond yields, domestic fiscal concerns, and a widening deficit. He warned that lowering interest rates in this environment could increase volatility in the foreign exchange market, especially if the U.S. Federal Reserve raises rates soon.