Israel's economy has been thrown into turmoil by the sudden escalation of conflict in the Gaza Strip. The Bank of Israel may postpone a cut in interest rates in a bid to reverse the plummeting foreign exchange rate, US-based news outlet reported.
The Israeli New Shekel was trading at 3.86 to the US dollar on October 7, the day the armed wing of Hamas launched a surprise rocket and ground attack from the besieged Gaza Strip. It now stands at 4.06 to the dollar, continuing a slide that began during a wave of domestic protests this summer against attempts by Prime Minister Benjamin Netanyahu's government to shake up the supreme court.
The bank has sold some $30 billion-worth of bonds and shares in a bid to prop up the shekel. But that has been undermined by ForEx speculators 'shorting' the currency — borrowing money short-term, exchanging it on the market and then buying it back after the exchange rate falls, pocketing the difference as profit.
"If the bank foresees substantial economic effects, investors may be inclined to seize opportunities in down markets," said economist Ronen Menahem from Mizrahi Tefahot Bank. "This will determine the direction in which stock, bond, and foreign exchange markets go."
The central bank has kept interest rates at 4.75 percent at the last two meetings of its monetary policy board, following 10 straight hikes since the start of 2023 in response to the inflationary crisis sweeping the West.
The crisis could mean delays to a hoped-for rate cut to boost economic growth, trailed by the bank in its July outlook report. That report predicted inflation falling from 3.5 percent in 2023 to 2.4 percent next year, while GDP growth held steady at three percent.
"The situation remains fluid and uncertain, which means that the Bank of Israel could bring rate cuts forward should the projected negative impact on growth become more prevalent or longer-lasting than immediate FX depreciation risks," said analysts from the US investment bank Morgan Stanley in a note to investors.