Israeli Shekel Stable Ahead of Bank of Israel Rate Decision and Jackson Hole Symposium

The foreign exchange market in Israel is calm one week before the Bank of Israel's interest rate decision, with the dollar trading above 2.98 shekels and the euro just below 3.49 shekels. Global markets are focused on the upcoming Jackson Hole central bankers' symposium, where Federal Reserve Chair Kevin Warsh will deliver a key speech on Friday, his first in the role. The US dollar index remains steady at 98.8 points, the euro is stable near 1.17 dollars, the British pound holds above 1.36 dollars, and the dollar trades at 158.9 yen in Japan.

Economists at Leader, led by Yonatan Katz, note ongoing uncertainty as the rate decision approaches. Bank of Israel Governor Amir Yaron's recent Bloomberg interview was relatively hawkish, reducing expectations for a rate cut at the upcoming meeting. Leader highlights that geopolitical tensions, especially between the US and Iran, though Israel is not currently involved, continue to influence the decision. Inflation remains low, with general inflation at 1.5% and core inflation at 1.4%, supporting a potential rate cut. However, the Bank of Israel places significant weight on inflation forecasts, which predict a temporary rise to 2.0% in September due to earlier holidays this year.

Bank Hapoalim economists add that rising global yields are impacting Israeli yields and monetary policy. Despite Israel's central bank rate trend differing from global patterns and a relatively low budget deficit of 3.3% of GDP, long-term yields in Israel have increased, with 10-year yields at 3.88% and 30-year yields at 4.39%. The yield gap with the US suggests Israel is responding to global yield increases rather than local factors. Hapoalim concludes that higher yields globally reduce the likelihood of significant rate cuts soon, indicating that relatively high interest rates are expected to persist. Regarding the Bank of Israel's upcoming decision, all options remain open, with markets currently pricing in one rate cut at some point and stabilization around 3.25%.