ira

From an all time strength of below 4 Shekels to the Dollar back in May, the Shekel is weakening. As of Sunday 28th of July the shekel is at 4.32 to the Dollar.
That's an 8% devaluation in 2 months. Is there a connection to the increase in the prime rate which was just raised.

josh007

What is the prime rate, do you mean interest rate?

ira

Just like in the U.S. there is a prime interest rate set by the central bank. This interest rate in Israel is set by the Bank of Israel.

The main purpose of the prime rate is to control liquidity of money in the economy (low prime rate more money high prime rate less money).

It is believed that the prime rate can control how much inflation there is in the economy. It also controls the amount of economic activity. The lower the prime rate the cheaper the cost of borrowing(therefore more economic activity).

Recently the bank of Israel raised the prime rate. This seems to have had the effect of devaluing the Shekel

ira

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Morgan Stanley: Interest rate hike justified
"Excluding the exchange rate effect, inflation is already above the target range."
Globes correspondent 26 Jul 07 09:27
Morgan Stanley analyst Serhan Cevik gives a positive response to the Bank of Israel's decision last week to raise its key interest rate in a report released today. Israel's central bank raised the interest rate by 25 basis points to 3.75% with effect from July 26. The rise came earlier than was generally expected.
According to Cevik, the rate hike is justified because the official inflation rate in Israel does not accurately register real inflation pressures. "While currency-linked prices posted a 4.5% decline in the first five months, those untouched by currency fluctuations were up 3.2%. In other words, excluding the exchange rate effect, inflation has already been above the target range," Cevik writes. The target range for inflation, set by the government is 1-3%.


"Global pressures and the rise in domestic demand will push inflation higher. Real GDP growth has averaged 5% over the last three years and accelerated to 6.3% in the first quarter of this year significantly above the economy’s potential growth rate of around 4.5%, according to our estimates," the report continues..

"Economic conditions do not justify accommodative interest rates. We welcome the central bank’s decision to raise interest rates by 25 bp and expect further tightening this year."

Cevik says that normalising interest rates will help keep the Israeli economy at a “sweet spot” of high growth and low inflation.

Published by Globes [online], Israel business news - www.globes.co.il - on July 26, 2007

© Copyright of Globes Publisher Itonut (1983) Ltd. 2007

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Livni

I dont know but Im always afraid of stock markets

I dont think they react to economic conditions anymore but to waves of investors from here and outside coming and going and betting on and options with really almost zero real economic reasons behind it and on exchange rates and the entire global system is now not more stable but more unstable.