The summer is well underway and Israelis are celebrating the strong shekel. They are traveling abroad in record numbers, and doing a lot of shopping on the way. Those staying at home are buying more at malls, where prices of imported goods should be falling. Even more Israelis are shopping on overseas websites like eBay and Asos where their shekels buy more than ever.
“The strengthening shekel could lower the costs of products where there’s competition, for instance electronics, overseas airfare, apparel, shoes and cars,” said Ori Greenfeld, chief economist at Psagot Investment House.
The euro has lost 7.5% of its value against the shekel since the start of the year, to 3.9801 shekels on Friday. The U.S. dollar has weakened 5.5%, to 3.535 shekels, the Swiss franc has lost 6% and the Japanese yen 4%.
The British pound sterling has lost 8.3% and last Thursday reached a 25-year low versus the shekel before edging slightly higher Friday to 4.4265 shekels.
The shekel is also at its strongest against the basket of currencies – an instrument used by the Bank of Israel to measure the impact of the shekel on the country’s trade position – it is at its strongest since the basket was created in 1999.
But the strong shekel isn’t being welcomed by everyone in Israel. Most critically, exporters are having a harder time keeping their products more price-competitive overseas, while travelers to Israel will find prices even higher than usual when they recalculate shekels in dollars and euros.
The Bank of Israel isn’t welcoming the strong shekel either – in fact, said Greenfeld, it’s in a trap.
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The central bank would like to raise interest rates because right now the base rate is less than inflation and the economy is strong, economists said. But if it raises rates, it will only attract more foreign capital to Israel and cause the shekel to appreciate further.
“In contrast to the United States, the Bank of Israel can’t lower interest rates because it never raised them to begin with. It’s also not like Europe, because the Bank of Israel won’t lower rates when they are negative and also won’t engage in quantitative easing,” he said. “So it doesn’t have a lot of tools to cope with the shekel’s appreciation – apart from intervening in the currency market.”
A lot of factors have conspired to bring the shekel to new heights, Among them is a persistently strong economy. Gross domestic product for the first quarter was recently raised upward to a 5% annual rate while unemployment is under 4% and the country’s debt-to-GDP ratio is a low 61%.
Even a second round of elections in September and the risk of further political stalemate has done little to deter investors.
Meanwhile , Israel’s high-tech sector continues to attract huge amounts of foreign capital through foreign investment in startups and exists. The IVC Research Center, which tracks Israel’s high-tech industry, reported last week that Israeli startups raised $2.32 billion in the second quarter, the highest three-month total since 2013.
The central bank left its base lending rate at 0.25% two weeks ago, the sixth straight time it has opted to keep the rate at the level.
That puts the Bank of Israel rate way under the U.S. Federal Reserve’s key rate of 2.25-2.5 5%, but earlier this month Fed Chairman Jerome Powell signaled that the rate would be coming down soon. The European Central Bank has hinted a rate cuts and quantitative easing.
“Israeli restraint versus global expansion is certainly supporting a strong shekel,” said Jonathan Katz, chief economist at Leader Capital Markets. As a result, he said the odds were growing that the Bank of Israel would intervene to buy dollars.
“First of all the Bank of Israel needs to put out an ... announcement that it doesn’t intend to raise rates until the end of 2020 – a kind of forward guidance,” he said. “In addition, it will need to intervene in the market to support domestic industry, which is very sensitive to a shekel appreciation. We can’t depend entirely on high-tech as an economic growth engine.”
Amir Kahanovich, chief economist at Excellence Nessuah Investment House, however, isn’t confident that intervention will do the trick. In fact, he contends it might have the exact opposite effect,
“Foreign currency purchase will show everyone that an interest rate reduction isn’t on the table for now, which will enhance the confidence of people investing in the shekel,” he explained. “That’s especially the case when [Israel’s] currency reserves are so big – it’s a kind of candy speculators love.”
Kahanovich said the Bank of Israel should be moving to lower interest rates and is playing with fire by delaying it.
“Even if it turns out that all the signs of an economic slowdown were wrong, the price of a rate cut would be small – in the worst case inflation in Israel would maybe reach the middle of the target range and the economy would grow somewhat faster than its potential,” he said.