The high rate of inflation in April surprised even the Bank of Israel. Immediately after announcing the tenth consecutive rate hike on Monday, Bank of Israel Governor Professor Amir Yaron told “Globes, “We have identified high inflationary factors such as overseas travel and that resulted in a great deal of surprise for us as well as the rest of the professional bodies. In other words, the Bank of Israel expected a much bigger drop in the rate of inflation, which is still hovering at 5% per year.
This week, Bank of Israel Deputy Governor Andrew Abir was interviewed by ‘Reuters’ after the rate hike announcement and provided explanations on at least some of the reasons for high inflation and why. the Bank of Israel’s predictions of its impending downfall have been wrong again and again. Abir strongly underlined: “The progress we expected to bring inflation back to target has been slower, mainly due to the exchange rate (of the shekel) and the creation of the political uncertainty that we have seen. over the past few months.”
He added: “We probably had to tighten our monetary policy more than we had envisaged due to the political uncertainty leading to an increase in Israel’s risk premium, a depreciation of the currency and therefore higher inflation. high”.
Abir was also interviewed by “Bloomberg” and said the extent of monetary tightening “has been the cost of currency depreciation around political uncertainty, increasing that premium for Israel around judicial reforms.” Since the start of 2023, the shekel has depreciated by 4% against the US dollar.
Abir added: “The predominant factor” in the shekel’s depreciation this year is probably the change in behavior of Israeli institutional investors. “They didn’t sell as many dollars to hedge their exposure to currency risk as they normally would.”
Abir’s remarks can be fully understood by examining the equation that has existed in the market for a long time: the strong correlation between Wall Street and the exchange rate of the shekel and the dollar. When the US stock market rose, Israeli institutional investors sold dollars and strengthened the shekel – and vice versa. Now, this correlation has ceased and despite the rises on Wall Street in recent months, the dollar-shekel exchange rate remains high and fluctuates around 3.55-3.70 NIS/$.
In recent months, since the announcement of the judicial reform, the indices of the Tel Aviv Stock Exchange (TASE) have also fallen. Since Justice Minister Yariv Levin announced his intention to push for an overhaul of the justice system, indices on the TASE have fallen sharply: the Tel Aviv 35 index has fallen by 2% and the Tel Aviv 90 by 7%.
On the other hand, during the same period, strong increases were recorded abroad. The S&P 500 index rose more than 7% and the Nasdaq 17%. Since the reform pause, the TASE has risen but the shekel has not recovered.
Published by Globes, Israel business news – en.globes.co.il – May 24, 2023.
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