Israeli Shekel Weakens Ahead of Bank of Israel Rate Cut Announcement

The Israeli shekel weakened at the start of the foreign exchange week ahead of the Bank of Israel's interest rate decision scheduled for 16:00. The central bank, led by Governor Amir Yaron, is widely expected to cut the benchmark interest rate by 25 basis points, from 3.75% to 3.50%. This decision will be accompanied by a press conference from Yaron and an update to the Bank of Israel's research division forecasts.

The US dollar rose by 0.6% to around 3.00 shekels, while the euro increased by 0.4%, trading just below 3.44 shekels. Globally, the dollar index edged up 0.1% to 100.9 points against a basket of major currencies. The euro remained stable above $1.14, and the British pound held steady above $1.33. The Japanese yen continued to trade near a 40-year low, with the dollar gaining 0.3% to 161.8 yen.

Economists at Bank Hapoalim noted that the consensus expectation of a rate cut has shifted market focus to the Bank of Israel's updated forecasts and Governor Yaron's press briefing. They highlighted that annual inflation and inflation expectations are within ranges that limit short-term uncertainty but have been significantly influenced by the sharp shekel appreciation. The inflation impact from currency appreciation typically fades after about two quarters, while wage increases and budget deficits are expected to affect inflation into next year.

Bank Hapoalim analysts added that the Bank of Israel aims to balance short-term inflation effects with longer-term risks. Financial markets currently place greater weight on the currency appreciation and low inflation, pricing in two additional rate cuts beyond today's expected reduction, potentially lowering rates to 3.0%. Yossi Manshe, co-CEO of Altshuler Shaham Financial Services, commented that the Bank of Israel is likely to proceed cautiously. Even if a rate cut is approved, a rapid shift to prolonged monetary easing is unlikely while inflation, the labor market, and local risks still require measured policy.