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Israel Holds Rates Steady, Diverging from US Fed Amid Currency Woes

Israel’s central bank kept interest rates unchanged on Monday, diverging from the US Federal Reserve’s last decision to tighten policy even after the shekel depreciated almost to a three-year low. The monetary committee left its benchmark at 4.75% for a second consecutive meeting, in line with the forecasts of almost all economists surveyed by Bloomberg. The shekel maintained losses after the announcement and traded 0.2% weaker against the dollar at 4:12 p.m. in Tel Aviv.

The central bank repeated its guidance that it “sees a real possibility of having to raise the interest rate in future decisions, if the inflation environment does not continue to moderate as expected”. In extending the pause, Israeli monetary authorities are opting to deviate from the direction taken by the Fed for the first time since embarking on an aggressive campaign early last year to tame inflation. The rate differential with the US widened in July when the Fed hiked, making the Israeli currency and bonds less attractive to investors at a time when those assets are already under pressure from political unrest.

Israel’s central bank governor, Amir Yaron, said that the decision to hold rates was based on a “balanced” assessment of the economic situation and the risks involved. He said that the central bank was closely monitoring the developments in the global and domestic financial markets, as well as the impact of the coronavirus pandemic and the political uncertainty on the economy. He also said that the central bank was ready to use all available tools, including foreign exchange intervention, to support financial stability and economic growth.

Israel’s economy has been recovering from a sharp contraction caused by the pandemic, but it still faces significant challenges. The country has been struggling with a surge in Covid-19 cases and deaths, which has prompted the government to impose a series of lockdowns and restrictions. The country has also been dealing with a prolonged political crisis, which has led to four elections in two years and a fragile coalition government. The country has also been facing security threats from its neighbors, such as Iran and Hezbollah.

Israel’s inflation rate rose to 1.9% in July, within the central bank’s target range of 1% to 3%, but higher than expected. The central bank expects inflation to moderate in the coming months, as some of the temporary factors that boosted prices, such as supply disruptions and base effects, fade away. However, it also warns that there are upside risks to inflation, such as higher global commodity prices, stronger domestic demand and wage pressures.

Israel’s shekel has been one of the worst-performing currencies in emerging markets this year, losing about 9% against the dollar since January. The currency has been hit by several factors, such as lower interest rates, weaker economic growth, higher inflation, political instability and regional tensions. The central bank has intervened in the foreign exchange market several times this year to stem the depreciation of the shekel and prevent further erosion of its competitiveness.