The Bank of Israel’s Governor, Amir Yaron, has said that currency intervention may only be required to sustain the lower shekel in the event of market failures. The central bank has kept the benchmark interest rates at 4.75% for the second consecutive month in line with market expectations. Yaron has also argued that additional interest rate increases may be necessary to combat inflation.
The U.S. dollar is trading at 3.8 on Tuesday, approximately 8% stronger than the Israeli shekel year-to-date, and hovering near its weakest level since March 2020. According to Yaron, the judicial changes have led to increased uncertainty in Israel, which has weakened the link between the shekel and financial markets abroad. The market is trying to figure out the appropriate risk premia that is associated with this increased uncertainty.
Yaron added that the market has functioned well in recent months despite the increased volatility. He thinks that the market should try to figure out that risk premia, and only if there will be market failures or significant movements that impede inflation, will they have to use the tools to deal with it.
Yaron believes that the shekel’s depreciation in recent months followed Prime Minister Benjamin Netanyahu’s decision to impose new legislation on the Supreme Court. The move sparked nationwide protests, and opponents of the bill argue that it weakens the purview of Israel’s top legal court and paves the path for abuses of power and improper appointments.
The Bank of Israel kept interest rates unchanged on Monday after a series of hikes which took the Rate up from a record low of 0.1% in April last year. Yaron believed that the central bank had done enough to allow inflation to come back to target levels in the first three months of next year. However, the central bank would not hesitate to raise rates again if there are any surprises or significant currency moves that put pressure on inflation dynamics.
USD/ILS Long (Buy)
Enter At: 3.8591
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