Israel Shekel strengthens as BoI holds rate

Bank of Israel held its benchmark rate unchanged yesterday at 0.1% as expected by most analysts, but the shekel appreciated following the decision. This suggests that at least some market participants had expected either 1) the policy rate to be cut to zero, 2) some form of QE, or 3) an FX cap. 

None of these policy changes materialised: but, further monetary easing is expected as highly likely if the Fed were to, for example, defer lift-off by an unspecified timeframe before year-end, says Commerzbank. 

The Israeli economy is currently caught in unfavourable conditions, with Q2 GDP stalling quarter-on-quarter and inflation continuing to surprise to the downside, with CPI ex-housing declining at a 1.3% yoy pace. 

Normally, BoI would have been easing policy at this time, but things are different this time because rates have fallen close to zero already and the Fed has announced its intention to tighten rates. USD-ILS is targeted around 3.80 by year-end, foresees Commerzbank.