Israeli Shekel Strength Eases Slightly as Inflation Expectations Gradually Rise
At the start of the foreign exchange week, the US dollar weakened slightly by 0.2%, trading just below 3.04 shekels. The euro remained stable, trading above 3.47 shekels. Globally, the dollar index held steady at 100.7 points against a basket of leading currencies, with the euro and pound also showing little movement, trading above $1.14 and $1.34 respectively.
Economists at Bank Hapoalim highlighted in their weekly review that despite expected short-term interest rate cuts by the Bank of Israel, a halt in reductions is anticipated later. The Bank of Israel cut rates in early July and its research division forecasts further declines to 3.0% next year. Although annual inflation is expected to remain low for the next two months, a gradual rise in inflation expectations is predicted. This outlook supports a rate cut to 3.25%, but future policy will depend heavily on various factors, especially the exchange rate.
Bank Hapoalim noted that annual inflation has fallen to 1.6%, influenced by the shekel’s appreciation. As this effect fades, inflation is expected to rise in the second half of the year. Renewed tensions in the Persian Gulf have driven global oil prices up, likely impacting August’s consumer price index. Additionally, reduced flight availability is expected to sharply increase summer airfare prices. While fuel and airfare are temporary inflation drivers, other factors such as a 6% wage growth rate and public sector price increases, including public transport, support a return of inflation to the target range. The 12-month inflation forecast stands at 2.0%.
Meitav’s chief economist Alex Zvezhinsky pointed to housing costs as a potential inflation driver going forward, especially without the dampening effect of a strong shekel. Rent prices have risen about 4% since late 2024, double the rate from 2013 to 2019, and are expected to remain elevated for years. Housing’s contribution to inflation is projected to stay around 1%, twice the pre-pandemic level. For overall inflation to stay near 2%, non-housing inflation, which recently dropped below 1% for the first time since the pandemic, must remain low. The shekel’s recent halt in strengthening may reduce its inflation-moderating impact.
