Shekel drops to 4 against the dollar, in first since 2015

The exchange rate of the New Israeli Shekel on Monday crossed the threshold of NIS 4 per dollar, the local currency’s weakest level since 2015, with Israel in its 10th day of war with the Hamas terror group.

Since the devastating massacre launched by Hamas on October 7 in Israel’s southern communities, in which more than 1,300 were killed, more than 4,000 injured, and some 200 kidnapped by terrorists, the shekel has dropped by about four percent against the US dollar.

Investor uncertainty over the duration and scope of the war has been growing in recent days, with the Israel Defense Forces gearing up for a ground operation to smash the terrorist organization in the Gaza Strip.

The currency’s weakness comes even as the Bank of Israel last week announced a plan to intervene in the foreign exchange market to try and moderate shekel volatility after the country formally declared a state of war. As part of the program, the central bank can sell up to $30 billion in foreign exchange to protect the shekel from collapse.

It was also introduced to “provide necessary liquidity for the continued proper functioning of the markets,” the Bank of Israel said.

Israel’s consumer price index (CPI), a measure of inflation that tracks the average cost of household goods, unexpectedly decelerated 0.1% in September, before Hamas’s unprecedented attack, figures by the statistics bureau showed Sunday.

Following the lower-than-expected September print, economists and market participants have started to price in an interest rate cut by the Bank of Israel as early as at its next monetary policy meeting on October 23, or even earlier, should it be necessary.

“The September CPI index points to the fact that the economy was slowing even before the war broke out,” said Israel Discount Bank chief economist Nira Shamir. “This strengthens our assessment that the Bank of Israel will lower interest rates by 50 basis points at the upcoming decision in the current situation of a sharp slowdown in growth in general and private consumption in particular.”

Rising interest rates since April last year have translated into larger borrowing and financing costs for Israeli mortgage and loan holders which have been struggling to make monthly repayments even before the start of the war. The central bank has steadily hiked its benchmark interest rate from a record low of 0.1% in April 2022 to 4.75% this year, in a bid to rein in inflation.

The ongoing conflict with Hamas in Gaza, is expected to cause significant damage to the Israeli economy and growth prospects, and take an even bigger toll on households and businesses, raising the odds that the central bank will lower borrowing costs to help ease the burden during the war.