The dramatic interest rate decision in Europe: Will it affect the shekel?
New inflation data in the eurozone may lead to a historic change in the Central Bank's policy. Here is how the emerging move will affect Israeli investors and the local currency exchange rate.
The latest inflation data in the eurozone may signal a significant change in the European Central Bank's (ECB) policy, according to an analysis by Gianluigi Mandruzzato, a senior economist at the Swiss bank EFG. According to him, the moderation in core inflation alongside the weakening of economic activity strengthens the assessment that the bank's interest rate hike cycle is nearing its end.
In August, general inflation in the eurozone stood at 3.3% on an annual basis, in line with the market's preliminary forecasts. At the same time, core inflation, which does not include volatile food and energy prices, fell to 2.4%, compared to 2.5% in July.
One of the key factors for the moderation was the rate of increase in service prices, which is considered an indicator that largely reflects local economic activity. At the same time, the annual growth rate in the eurozone fell to its lowest level since the beginning of 2022, which adds pressure on decision-makers at the Central Bank.
According to the analysis, the rise in energy prices has not yet led to significant effects on the other components of inflation. This situation may reduce the need for an aggressive monetary response from the ECB.
Despite this, it is estimated that the Central Bank is expected to implement an interest rate hike at the meeting scheduled for September 10. However, the latest data indicate that interest rates are approaching the end of the monetary tightening cycle.
Another factor restraining financial conditions is the rise in yields on medium- and long-term bonds. Along with high geopolitical uncertainty, these developments may reduce the need for further interest rate hikes.
For Israeli investors exposed to markets in Europe, the change in direction in interest rate policy may be significant. The end of the interest rate hike cycle may affect the pricing of bonds and stocks in the eurozone, and at the same time may also affect fluctuations in the euro exchange rate against other currencies, including the shekel.
