Shekel stable but analysts fear rapid depreciation

Yesterday two decisions were taken that could be fateful for Israel’s economy. In the first decision, the Bank of Israel kept the interest rate unchanged at 4.75%, ending a run of ten consecutive rate hikes over the past 15 months. In the second decision, the Knesset passed the bill to remove the court’s ability to nullify a decision by an elected official or by the government on the grounds that it is unreasonable in the extreme.

On the face of it the Knesset passing a bill in its first reading should not impact the markets but the Bank of Israel has said repeatedly that the issue of the judicial overhaul is tightly related to the Israeli market in general and the forex market in particular.

So far the forex market in Israel is calm. The shekel is stable against the dollar and weakening against the euro. In afternoon inter-bank trading, the shekel-dollar exchange rate is up 0.01% at 3.710/$ and the shekel-euro rate is up 0.45% at NIS 4.082/€.

Yesterday, the Bank of Israel set the representative shekel-dollar rate down 0.188% from Friday, at NIS 3.710/$, and the representative shekel-euro rate was set 0.527% higher at NIS 4.064/€.

What changes can we expect to see on the forex market and stock market following these decisions.

BDO Israel chief economist Chen Herzog says, “Today the shekel-dollar exchange rate and the market generally is relatively stable, as a result of the Bank of Israel refraining from hiking the interest rate yesterday” But he stresses that the uncertainty surrounding the judicial overhaul is still expected to have a major impact on the Israeli economy.

“Enactment of the law by the Knesset would lead to a rapid depreciation of the shekel”

IBI Investment House chief economist Rafi Gozlan told “Globes,” “The influence of the interest rate is currently less dominant compared with the political-judicial factor, so that while legislative efforts continues that do not have agreement this is translated into a rise in the risk premium of the economy and depreciation of the shekel.”

Gozlan adds that due to the relative stability of the forex market, “The response so far reflects the moderation of the market in order to examine whether the move yesterday in the Knesset is a change of attitude by the government or part of a negotiation process, since the first reading was expected to pass, but final legislation is not at all clear.” Gozlan concludes that if the current version of the law is advanced to a second and third reading, this will lead to “a rapid depreciation of the shekel exchange rate.”

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Herzog agrees that unilateral legislation will have such a negative effect, which “could lead to an increase in the risk premium of the State of Israel, a weakening of the shekel, and an increase in interest rates, with a heavy economic price for the Israeli economy.” Herzog adds another factor that raises the risk upwards – the rating companies. He explains that the rating companies based their latest credit rating updates on dialogue and promotion of legislative measures only by broad consensus. Therefore, unilateral legislation will affect the rating in the future.

Herzog quotes the words of the governor of the Bank of Israel at the press conference yesterday, calling for institutional changes only with broad consensus to avoid uncertainty in the economy. Prof. Amir Yaron said that without consensus private consumption would decrease and export and import volumes in Israel would suffer as a result of the political uncertainty.

Yaron reiterated the macroeconomic forecast from April, which stressed that political development could cause a substantial decline in Israeli GDP and growth. Herzog concluded, “As the governor pointed out yesterday, the unilateral promotion of the reform measures and continued uncertainty may have significant economic costs.”

Published by Globes, Israel business news – en.globes.co.il – on July 11, 2023.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2023.