Israel’s central bank has become the latest to fall in line with a global move towards easier monetary policy, keeping interest rates unchanged but hinting at cuts to come if inflation remains subdued and the currency continues to strengthen.
The shekel ranks as the best performer against the US dollar so far this year among 31 major currencies tracked by Bloomberg, up almost 6 per cent, as fund managers have sought refuge from global turmoil in the country’s financial assets.
On Wednesday the Bank of Israel said that if the shekel kept rising it would take longer to reach the bank’s target of inflation between 1 per cent and 3 per cent, and that it would consider making monetary policy “more accommodative”. In its statement, the bank dropped language about a “rising path” for its key interest rate, which remains at 0.25 per cent, noting mounting risks to the global economy over the US-China trade war.
It was a “very dovish hold”, said Win Thin, global head of currency strategy at Brown Brothers Harriman in New York. “The messaging makes it clear they would like a weaker shekel.”
The currency dropped in the wake of the announcement, but not by much — about a third of 1 per cent, barely denting its rise over the past months.
Governor Amir Yaron had teed up Wednesday’s announcement with an address to the gathering of the world’s top central bankers at Jackson Hole, Wyoming, last weekend, in which he noted that the shekel had strengthened thanks to Israel’s perceived status as an “emerging markets safe haven”.
He attributed the inflows to the country’s improved “fundamentals”, citing a long expansion in employment, current account surpluses and a fall in the debt-to-GDP ratio under a 16-year-old fiscal stabilisation programme. The bank raised rates once since 2011, and let rates hover near zero for years, as the economy reaches near full-employment.
Israel is “one of the best of the lot” among emerging markets, said Mr Thin. “It’s stable and away from the fray of the trade wars. It’s just been a good solid story.”
Analysts note that the haven status appears to be decoupled from political instability, including growing tensions with Iran, air and drone strikes attributed to the Israeli military in Syria, Lebanon and Iraq, inconclusive elections in April and the possibility of Prime Minister Benjamin Netanyahu facing indictment for alleged bribery and fraud.
But as investors fret about a global recession, the country’s tech-heavy export-driven economy has remained relatively immune. High-value exports, including military hardware, are generally unaffected by sudden appreciation in local currency, and are often priced in US dollars to begin with.
Foreign investment has held steady — including a $10bn investment announced by Intel earlier this year — and Israel continues to prepare for exports from natural gas deposits that are coming online, including a $15bn contract to supply Egypt by early 2019.
Such “positive factors” are pushing the shekel higher, wrote Mai Doan, an analyst at Bank of America, in a recent note to clients. As a result, she urged Mr Yaron to “tone down the hawkish rhetoric” evident in the minutes to the central bank’s July meeting.
This year’s next best performing major currencies, after the shekel, are the Russian rouble (+4.4 per cent), the Japanese yen (+3.6 per cent) and the Canadian dollar (+2.5 per cent).
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