Shekel Extends Fall to Nine-Month Low as Bank of Israel Unexpectedly Cuts Base Rate

Israel has cut its benchmark interest rate for the second straight month in August taking the rate to a record low, and the surprise move has weakened the shekel to a nine-month low.

At the 25 August review, Israel's central bank set the interest rate for September at 0.25%, down 25 basis points from the August rate.

The Bank of Israel had unexpectedly lowered the "headline rate", the main policy rate of the central bank, 25 basis points to 0.5% at the July meeting, and therefore, Monday's decision was keenly watched.

Most forecasts were for no change at the August meeting, as the central bank had delivered a cut, that too unexpectedly, only a month ago.

Israel's data in August were largely negative surprises, and the big fall in the GDP growth to 1.7% in Q2 from 2.8% in the previous quarter, as per the 17 August data, had pushed the shekel sharply lower against the dollar.

Israel's GDP growth is forecast at 2.9% for 2014 but the central bank has said the Israel-Hamas war could reduce it to 2.4%.

The Bank of Israel noted that there was an additional decline in the inflation environment in August.

"Inflation measured over the preceding 12 months declined to 0.3%, and the decline in inflation expectations for all terms continued," a central bank statement said.

The target rate for inflation in Israel is 1-3%.

Forecasters' projections for the coming year, and one-year expectations derived from the capital market, are quite near the lower bound of the target range, and expectations derived from banks' internal interest rates declined below the range, the bank said.

In an earlier release on Monday, the Central Bureau of Statistics of Israel said the unemployment rate in the country fell to 6.2% in July from 6.5% in June.

Israel wanted its currency weaker than its present level as the recent rally in it has hit its export prospects significantly.

"Continued depreciation (in the shekel) will support a recovery in exports and in the tradable sector," the policy statement said.

The shekel had rallied more than 20% from its July 2012 low in the next two years, but after hitting a peak of 3.4015 in mid-July this year, it has weakened more than 4%.

Shekel Technical Outlook

The USD/ILS pair has managed to break above the channel resistance with Monday's rally and is now testing an important medium-term support-turned resistance level at 3.5775.

The levels to watch further on the higher side are 3.6530 and 3.7027 ahead of 3.7724 and 3.8656. The pair will then look at 3.9834 before retesting the July 2012 peak of 4.0984.

On the downside, the USD/ILS has its first level at 3.5251 and then at 3.4786. The next levels to watch are 3.4383 and 3.4015 ahead of a retest of the 2011 low of 3.3500.