UBS: Bank of Israel to intervene at 2.8 shekels per dollar

According to UBS analysts, this exchange rate has the potential to push inflation below the lower end of the price stability target range (1%).

UBS assumes that the regulator will prefer to first continue reducing the rate before resorting to large-scale foreign exchange interventions. According to the bank’s forecast, the rate could be reduced twice in a row – next week and in July – to 3.5%. At the same time, UBS does not exclude a scenario in which the Bank of Israel uses both instruments simultaneously: cutting rates to support economic activity and buying dollars to prevent an excessive fall in inflation.

The review records a sharp turn in the Israeli macroeconomic narrative: if about two years ago the Bank of Israel was struggling with high inflation and a sharp devaluation of the shekel, now the main threat is too low inflation as a consequence of the strengthening of the national currency.

UBS is not inclined to explain the strengthening of the shekel by fundamental macroeconomic indicators in Israel. According to bank analysts, we are talking about abnormal capital flows. Two key factors pushed the shekel higher: a surge in currency hedging by Israeli institutional investors and the $32 billion Google-Wiz megadeal.