Calm in the Foreign Exchange Market: Dollar at 2.99 Shekels

Calm prevails in the local foreign exchange market following the sharp retreat of the shekel and the statement by Governor Amir Yaron that an interest rate cut at the upcoming meeting is not guaranteed. The dollar is trading around 2.99 shekels, while the euro is slightly above 3.46 shekels.

In global markets, the dollar index against a basket of leading currencies is down 0.1% at 99.6 points; the euro is unchanged, trading around 1.16 dollars; the pound is also unchanged, above 1.35 dollars.

Governor Amir Yaron stated in an interview with Bloomberg that the interest rate decision to be made in two weeks will be a 'live decision' and a cut is not guaranteed. The decision will be made at the bank's meeting on September 1, following the previous cut from 3.75% to 3.5% (the second consecutive cut and the third since the beginning of the year, when it stood at 4%).

Yaron noted that the decision remains open and will be made in accordance with incoming data. He added that since the previous decision, uncertainty has increased, and the bank must weigh the labor market, inflation, geopolitical risks, and fiscal risks. Although annual inflation fell in July to 1.5%, Yaron estimates it will "return to the 2% range in the coming months," reaching the middle of the Bank of Israel's inflation target.

Regarding the next government and the deficit, Yaron said the government formed after the October elections must return the debt-to-GDP ratio to a downward path while managing defense expenditures and investing in growth engines. Regarding this combination, he said:

"Managing these three things will be difficult."

Ofer Klein, head of the economics and research department at Harel, estimates that the bank will refrain from cutting interest rates at the upcoming meeting:

"Inflation remains low, but in our assessment, the probability of another interest rate cut in two weeks is low."

Klein's forecast for the upcoming indices anticipates a sharp 0.9% rise in the August index against the backdrop of significant increases in flight and vacation prices, alongside rising fuel costs. "On the other hand, in September, the first negative index since January is expected with a decrease of 0.2%, mainly due to the drop in flight and fuel prices. For the next 12 months, our forecast is unchanged at 1.9%."

Klein notes that while inflation and expectations are below the center of the target, the data reinforces the assessment that the interest rate will remain unchanged. This is due to rising geopolitical and budgetary uncertainty, rapid wage growth, and strong economic data. Nevertheless, the firm still estimates that the interest rate will return to a downward trend towards the end of the year.