Israeli Shekel Weakens as Inflation Data Suggests Rising Pressure on Prices

The US dollar strengthened in the Israeli market this morning, rising by 0.4% to trade above 2.97 shekels, contrary to a calming trend in global currency markets. The euro also increased by 0.2%, trading at 3.44 shekels. Globally, the dollar index remained steady at 99.6 points, with the euro stable just below $1.16 and the British pound steady above $1.35.

Following the release of Israel's July inflation data showing an annual rate of 1.5%, analysts at Psagot Investment House noted that the downward trend in inflation has likely reached its limit. They forecast that starting with the August index, inflation will begin to rise again, moving toward the Bank of Israel's target midpoint of around 2%, within the official target range of 1% to 3%. Core inflation's decline is also expected to plateau and then slowly increase over the next year.

Psagot highlighted ongoing inflationary pressures stemming from various risk factors, including tight labor markets, rising wages, rental market pressures, a potential future weakening of the shekel, and fiscal policy concerns. On the deflationary side, they identified possible further drops in oil prices, additional strengthening of the shekel, and a significant reduction in military reserve forces, though the latter is considered unlikely due to Israel's extensive security needs. Another potential deflationary factor is the spillover of stagnation in the real estate market to rental prices.

In conclusion, Psagot expects the Bank of Israel to continue a slow pace of interest rate cuts, completing two more reductions before reassessing its next policy moves.