Slight rise in the shekel at the start of the interest rate week: Dollar at 2.99 shekels

We are opening the foreign exchange week and the interest rate week with a slight rise in the shekel against the American currency. Tomorrow, the Bank of Israel will publish its monetary decision. Although assessments that there will be an interest rate cut have been increasing in recent days, there is also a broad consensus that this is a "borderline" meeting and that any decision is possible.

In global markets, after the speech by Fed Chair Kevin Warsh in Jackson Hole, they are waiting for the August employment report to be published on Friday. The dollar is down 0.2%, trading around 2.99 shekels. The euro is climbing and trading above 3.46 shekels, after its representative rate was set on Friday at 3.456 shekels.

In global markets: the dollar index (against a basket of leading currencies) is down 0.1%, at 99.6 points. The euro is without significant change, trading around 1.16 dollars. The pound is without significant change, above 1.35 dollars.

In a review published by Deutsche Bank ahead of the Bank of Israel's decision, the German bank estimated that we can expect an interest rate cut at the upcoming meeting. "Conditions in the local economy continue to generally support further monetary easing. Inflation remains comfortable below the midpoint of the target range, with recent data pointing to a broad moderation in price pressures, rather than weakness concentrated in a small number of volatile components."

Deutsche Bank noted that alongside its forecast, it is difficult this time to estimate what the Bank of Israel's decision will be and it could go either way. "We continue to expect an interest rate cut of 25 basis points, which will bring the interest rate to a level of 3.25%. Inflation remains below the target, and recent data continue to point to a broad moderation in inflationary pressures. The dollar-shekel exchange rate has fallen again below 3.0, while geopolitical risks and oil prices have moderated compared to previous peaks, thereby removing one of the main barriers to continuing the interest rate cut cycle. However, we do not rule out a decision to leave the interest rate unchanged. Strong growth in the second quarter, the ongoing risks stemming from fiscal and security expenditures, the volatility around expectations for Fed policy, and the possibility that the Bank of Israel will prefer to pause after two consecutive cuts and collect additional data regarding the inflation forecast, all justify caution. Overall, we see the decision as close, but continue to estimate that the balance of risks leans in favor of an interest rate cut."

Economists at Leader, led by Yonatan Katz, agree that the chances lean toward an interest rate cut, although hesitation is expected at the central bank. "Moderation in the inflation environment, a relatively strong shekel, and some relief on the supply side in the labor market support the interest rate cut. This is not a simple decision. The Governor even noted in an interview with Bloomberg that a lively discussion is expected in the Monetary Committee."

There is a series of justifications for a cut at Tuesday's meeting, they say at Leader. "Core inflation rose by only 1.4% in July, with moderation in all major components. The shekel remains relatively strong and serves as an anchor for meeting the inflation target — it has strengthened by 7.3% since the beginning of the year against the basket of currencies and by 0.4% since the last interest rate decision." At Leader, they add that some calm is also emerging in the geopolitical environment. "Although it is not complete quiet, the threat of immediate escalation with Iran has decreased."

At the same time, the bank also has arguments that would justify standing pat. This is beyond the fact that cuts have already been made this year. "After two consecutive interest rate cuts, the Bank of Israel can afford to slow the pace of cuts," they say at Leader.

Economists at Bank Hapoalim note that "the wind blowing from Jackson Hole does not support an interest rate cut, but on the other hand, inflation data allow it, and the window of opportunity for a cut may close later." They are skeptical about further cuts down the road: "In any case, the markets do not see a continuous process of interest rate cuts, but rather a stabilization of the interest rate after one cut at a level of 3.25%. Inflation expectations are stable at a level of about 1.8% for the next two years; this figure seems low compared to the wage increase in the economy and the assessments that the new government to be formed will be forced to make fiscal adjustments that could be reflected in price increases."