The Israeli shekel witnessed a new decline in the financial markets, as it fell against the dollar by 1% to reach 3.74 shekels, while the euro jumped by 1.3% to reach 4.16 shekels.
This weakness is the result of several factors, including political and security tensions and rising inflation, which increases uncertainty in the local economy.
The Israeli economic platform Calcalist said that the instability in the market worsened with reports indicating advanced talks to appoint Gideon Saar as defense minister instead of Yoav Galant.
The chances of a military escalation in the north are also increasing, according to the platform, as Defense Minister Galant stated that calm in the north is no longer an option and that confrontation has become “a matter of time.”
All these developments directly affected the strength of the shekel against foreign currencies, the platform says.
Inflation is another reason.
The price index rose by 0.9% on a monthly basis in August, leading to an increase in annual inflation of about 3.6%.
This rise in inflation increases pressure on the Bank of Israel, which may find it difficult to cut interest rates in the near future, according to the platform.
While the United States is heading towards cutting interest rates for the first time since 2020, this option seems to be off the table for Israel due to high inflation and the weak shekel, according to the platform.
Negative growth data
Meanwhile, the Central Bureau of Statistics announced an update to the growth data for the second quarter, noting that growth was lower than previously reported, at just 0.2%, reflecting a weak annual growth of 0.7%. These weak figures are increasing pressure on the Israeli economy and contributing to the weakness of the shekel, according to the platform.
Ronen Menachem, chief economist at Mizrahi Tefahot Bank, believes that the unexpected rise in the price index is strengthening the shekel and making it difficult for the Bank of Israel to cut interest rates at the next meeting.
He stressed that high inflation and pressures on apartment prices constitute two major obstacles to the stability of the local currency.
Additional factors
Among the pressures is the increase in government bond issuances worth 18 billion shekels ($4.8 billion) this month alone.
This created a gap of 1.2% between bond yields in Israel and the United States, even though interest rates in Israel are lower.
The platform points to another factor, which is an upcoming visit by a delegation from Moody’s, which may increase concerns about the possibility of another downgrade of Israel’s debt rating, further weakening the shekel.
According to Menachem, security tensions, rising inflation and the lack of financial clarity are putting the shekel in a weak position. With these factors persisting, a rate cut in the near future seems unlikely.
