As the shekel appreciates, when might the BoI intervene?

The shekel is very close to a four-year peak against the US dollar. Today’s representative exchange rate was set at NIS 3.218/$, and the rate has fallen by over 10% within a year. This acts as a brake on inflation, and reflects the strength of Israel’s economy, but it also harms the profitability of Israel’s exports.

According to Phoenix Financial, the strong shekel is a result of a sharp rise in investment from overseas in the local capital market, a fall in Israel’s risk premium, the sharp rises in the Tel Aviv Stock Exchange’s main indices, and high economic growth figures for the third quarter. At the same time, the dollar has weakened globally, partly because of President Trump’s trade wars.

A further explanation for the appreciating shekel is the 20% rise in the Nasdaq index so far this year. Israeli financial institutions allocate a large part of their investments to foreign markets, but their foreign currency exposure has limits. When the value of their dollar-denominated holdings rises, they have to balance their currency exposure by selling dollars and buying shekels, causing the shekel to appreciate.

The other side of the coin, as mentioned, is the harm to the profitability of exports, and ultimately to exports themselves, which could lead exporters to demand intervention by the Bank of Israel in the foreign currency market. In the past decade, the central bank has done this sparingly. In 2020, it injected dollars through swap deals to financial institutions that were suffering from a squeeze. Less than a year later, when the shekel started to appreciate sharply, touching NIS 3.11/$, the Bank of Israel bought dollars to halt the trend.

When the Swords of Iron war broke out in October 2023, the Bank of Israel launched a program for the sale of up to $30 billion to support the shekel, although in fact it sold only about a third of this amount. The last intervention came with the Rising Lion operation against Iran in June this year, when the Bank of Israel sold the fairly modest sum of $300 million to prevent the shekel from depreciating sharply.

More than one way to intervene

The Bank of Israel’s toolkit for directly or indirectly influencing the foreign exchange market is broader than buying and selling dollars. One other way is more aggressive interest rate cuts, to reduce the attractiveness of investment in shekel assets.

The Consumer Price Index reading for November published this week showed a 0.5% fall in the index and annual inflation running at 2.4%, well within the Bank of Israel’s target range of 1-3%, ostensibly giving room for cutting the interest rate, but analysts believe that the inflation figure will not be the main concern of the Bank of Israel Monetary Committee at its meeting in January, and that a further interest cut in addition to the 0.25% cut in late November is not likely.

Most analysts see shekel strengthening

Among the reasons for this are expectations of a rise in the inflation rate in the next Consumer Price Index reading; the tight labor market, with job vacancies high and unemployment at a historical low; and the state budget, which is based on a forecast fiscal deficit of 3.9% of GDP, putting in doubt the possibility of reducing the government debt:GDP ratio.

Bank Hapoalim’s macro review this week stated: “The business trends survey indicates that the sharp appreciation of the shekel is not substantially weighing on exports, at least for now.” The bank says that the stronger shekel has eroded company profitability “but, taking a historical perspective, not dramatically.” Exporters have orders backlogs, and cite neither the strength of the shekel nor anti-Israel boycotts as constraints at present.

Investment house Meitav sounds less optimistic. It says that expectations of orders for industrial exports have not materialized, and that exports are at a standstill. “The threat to exports from the appreciation of the shekel is starting to be felt by businesses, and the constraint of erosion of profitability has become more severe in exporting sectors.” If this trend continues, Meitav sees pressure growing on the Bank of Israel, and it will have to decide whether to speed up interest rate cuts or revert to buying dollars.

Meitav and Bank Hapoalim base themselves on the same data: the Central Bureau of Statistics’ survey of business trends, in which respondents rank various constraints, such as a shortage of orders and erosion of profitability.

Meitav chief economist Alex Zabezhinsky explains that there is no contradiction in the data. “An exporter may still have many orders, and at the moment his problem is that his profitability has been eroded. He receives money, and each time this money is worth less in shekels. But when he wants to bid in new tenders, he will find it hard to win them, because he will be less competitive unless he manages to become more efficient and adapt to the exchange rate. Every country is concerned about this and is trying to weaken its currency if it is over-strong in order to preserve exports.”

Bank Hapoalim chief financial markets strategist Modi Shafrir says, “If we examine the data for the services sector, including high tech, we see a fairly sharp decline in the shortage of orders constraint in the past few months. This is further evidence that Israel’s technology industry is thriving again. We are seeing erosion of profitability that goes hand in hand with the appreciation of the shekel, but the erosion in not dramatic according to the Central Bureau of Statistics’ business trends survey.

“The bottom line is therefore that the appreciation of the shekel is weighing on exporters but they are coping, certainly when it comes to high-tech services. We have also seen a renewed rise in goods exports. On the other hand, the shekel has ben one of the main factors restraining inflation in Israel, enabling it to get back into the target range. That has many positive consequences for private consumption as well.”

Shafrir has an answer to the question when the Bank of Israel will intervene. “If we reach three shekels to the dollar, the Bank of Israel will have to think about intervention, and it may cut interest rates a little faster than planned because then the profitability of the exporters will be further eroded. A decision by the Bank of Israel whether to intervene will depend on the inflation environment at the time. For now, we’re not there. This is true not just of high tech but also of core industrial exports.”

Zabezhinsky adds that analysis of the change in exchange rates in the past ten years against central banks’ average interest rates indicates a direct connection: the stronger the currency, the lower the interest rate. This demonstrates that central banks were concerned about erosion of profitability of exports, and today, in an environment of trade wars, that’s an important consideration.

“Since inflation is falling and is expected to reach an annual rate of 2% within a month or two, the appreciation of the shekel can be expected to make the Bank of Israel take the exchange rate more seriously,” Zabezhinsky says.

Zabezhinsky does not rule out intervention by the Bank of Israel in the foreign exchange market if he trend continues over the next six months. “I don’t rule out the possibility that we’ll see intervention in the foreign exchange market, and here the interesting question arises of the attitude of the US administration to intervention in the foreign exchange market, because it’s very sensitive to these things.

“When will the bank intervene? That’s a million-dollar question, or much more than that. But the more you hear companies complaining, the greater will be the pressure on the bank. If the shekel reaches 3.1 against the dollar, we’ll hear them more loudly.”

Published by Globes, Israel business news – en.globes.co.il – on December 18, 2025.

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