Israel Central Bank Should Be Able to Follow Surprise Rate Cuts

Barclays Plc. had the 2nd most accurate predictions on Shekel, the major currency of Israel, in last quarter. Barclays now has come up with another forecast that the Central Bank of Israel should be able to follow the surprise interest rate cut of yesterday and the USD purchase plan with further measures if they wish to succeed in stemming the gains of Shekel. According to Senior Economist of Barclays, Daniel Hewitt, the Central Bank of Israel has a big task in its hand and over the long term, it should win this fight.

On yesterday, Shekel declined by 1.2%, marking the biggest 1-day drop that it had since last August. The policy makers of Israel, led by Stanley Fischer, the Governor of the Bank of Israel, unexpectedly reduced the benchmark lending rate by 25 basis points. They also pledged to buy around $2.1 billion by end of the current year. Shekel showed huge improvements in 2013 after the start of natural gas production lured many foreign investors.

On today, Shekel declined by 0.8% against USD and it is currently priced at 3.6444 per USD. Hence, this year’s surge of Shekel has now been trimmed to 2.5%, marking the 2nd biggest surge among the most traded currencies, just after Mexican Peso.

The benchmark TA-25 Index of Tel Aviv recorded its biggest gain in last 3 months. Incidentally, the largest mobile phone provider of the country, Cellcom Israel Ltd. saw declines in share price as it experienced a drop of 21% in the 1st quarter sales of the same.

In last April, for the first time in last 2 years, the Bank of Israel started to buy Dollars. This was done in an attempt to arrest the climb of Shekel and thereby bolster the exports. Incidentally, exports make up around 40% of the overall economy of Israel.

Fischer says current borrowing costs in Israel are not low enough to decline foreign capital. The 1.5% rate of the country compares with 0.5% or lower in other countries such as US, UK, Japan and Euro region.

According to the most accurate forecaster of Shekel in the 1st quarter, Olgay Buyukkayali, the Central Bank will cut down the rates to 1% or even lower than that. Apart from that, the bank may also engage in quantitative easing or some sort of unsterilized intervention.