Israeli Shekel Stabilizes as Inflation Eases and Economy Shows Strong Growth Ahead of Bank of Israel Meeting

The Israeli shekel showed signs of stabilization early this week following the release of July inflation data on Friday, which indicated a monthly increase of 0.3% and a slight annual inflation decline to 1.5% from 1.6% in June. The Bank of Israel is expected to respond at its upcoming meeting on September 1, with the current interest rate standing at 3.5%. Adding to the positive economic signals, Israel's GDP surged by 15.4% annualized in the second quarter (3.6% quarterly), rebounding sharply from a 3.8% contraction in the first quarter, which included the impact of the recent conflict.

Currency markets reflected this calm, with the US dollar trading just above 2.95 shekels and the euro around 3.42 shekels. Globally, the dollar index slightly declined by 0.1% to 99.5 points, while the euro and pound gained marginally against the dollar. In Japan, the dollar weakened following disappointing growth figures.

Economists at Leader Capital, led by Yonatan Katz, noted that the inflation data showed moderation across key components, with core inflation (excluding energy and fresh produce) easing to 1.4% year-over-year from 1.5%. Housing service prices, a major inflation driver, also moderated, with owner-occupied housing costs slowing to 3.7% from 4.4%, and new tenant lease contracts easing to 4.7% from 6.6%. They suggested these trends support further interest rate cuts, potentially starting at the September meeting, with another possible reduction before early 2027.

Bank Hapoalim economists highlighted the uncertainty surrounding the Bank of Israel's decision, emphasizing that the exchange rate will heavily influence the outcome. They described the current environment as a "window of opportunity" for rate cuts, given the lower inflation, strengthening shekel, and positive budget deficit surprises. However, they noted that global central banks have paused rate hikes but may resume later this year. Despite strong growth and some real estate market recovery, the current interest rate does not appear to hinder economic expansion. Market expectations include one rate cut this year to 3.25% and another next year to 3.0%.

Mizrahi Tefahot's chief market economist, Ronen Mizrahi, called the second-quarter GDP report encouraging and stronger than expected, though he cautioned that data volatility requires careful interpretation. He added that while the GDP figures do not strongly support immediate further rate cuts, the Bank of Israel will likely consider both these "noisy" data and the moderate inflation figures in its policy deliberations.