Currency Intervention Nod Trips Up Shekel, Hints Rate Hike Nears

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The Bank of Israel said it will consider intervening in currency markets if the shekel continues appreciating, an obstacle to its plans to raise interest rates because it’s complicating inflation’s return to the midpoint of the government’s target range.

Minutes released on Thursday showed the monetary committee wasn’t unanimous over whether to raise borrowing costs at its April meeting, with one of five members advocating a hike to 0.5 percent from the current 0.25 percent. The other four members recommended the bank stay put.

The shekel retreated after the report, sliding the most against the dollar on Thursday since November 20. It traded 0.6 percent weaker at 3.5942 as of 5:25 p.m. in Tel Aviv.

“They’re sort of preparing markets for a possible rate hike,” said Jonathan Katz, economist for Leader Capital Markets Ltd. “There’s a slightly more hawkish tone there.”

With inflation outpacing forecasts for three straight months, the central bank may be preparing to resume rate increases after it hiked rates in November for the first time since 2011. Staff projections released this month indicated the benchmark will rise to 0.5 percent toward the end of the third quarter and showed two more moves in 2020 that will bring it to 1 percent by the end of next year.

‘Depreciate a Little’

“In order for us to see a rate hike next month, the exchange rate should depreciate a little,” said Psagot Investment House Ltd. head of macro research Guy Beit-Or. He sees the chance of a rate hike as “not insignificant,” with a probability under 50 percent in May.

The shekel warning was a departure from Governor Amir Yaron’s stance at his appointment ceremony in December, when he said the exchange rate should be determined by the market “without the need for significant intervention.” That came weeks after the central bank said it was ending a currency-purchase program to offset the impact of natural gas production on the shekel.

The shekel has gained 4.1 percent against the dollar so far this year, making it the sixth-best performer in the world.

At the central bank’s latest news conference in April, Yaron said intervention remained a tool the bank could use in case of “anomalous fluctuations” in the currency market. The Bank of Israel has barely intervened in the foreign exchange market in recent months.

Amir Kahanovich, chief economist for Excellence Investment House, saw a dovish tone in the minutes and said the comment about intervention “is more important to us at this point as a sign that they’re really concerned about the shekel.”

To contact the reporter on this story: Ivan Levingston in Tel Aviv at ilevingston@bloomberg.net

To contact the editors responsible for this story: Lin Noueihed at lnoueihed@bloomberg.net, Paul Abelsky

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