Market News

(Bloomberg) -- Israel’s central bank may need to tighten monetary policy should the shekel weaken further, Governor Amir Yaron said on Tuesday, one week after raising the country’s interest rates to their highest in 17 years.

Deeper economic pressure from a weakening currency could warrant a change, even after the bank’s monetary committee said on May 22 its hikes were doing enough to ensure a moderation in price growth over the coming year.

“Since then, we have experienced further depreciation of about 2%-3%,” Yaron said at a Jerusalem conference on economic policy. “If this trend continues, even more restrictive monetary policy may be required.” 

The shekel gained as much as 0.5% to 3.713 against the dollar on Tuesday, the most in about two weeks and paring its losses this year to 5.3%. That put it on track for the third-best performance for the day among a basket of expanded major currencies tracked by Bloomberg.

The Israeli currency slumped last week after parliament passed a new national budget. It contained big grants for religious programs, helping Prime Minister Benjamin Netanyahu stabilize his right-wing coalition but drawing criticism from economists who said the money would not help Israel in the long term.

Goldman Sachs Group Inc. cut its shekel forecasts in response.

Netanyahu suspended a judicial overhaul in March following mass protests. After the budget was approved, he said the plan would be revived and expressed hope an agreement could be reached with political opponents.

Economic Risk

Yaron, who’s previously been critical of the government’s judicial proposals, warned on Tuesday that they are affecting the exchange rate and economic investment. The new budget doesn’t have enough provisions that drive growth, he said.

While Israel is set to return to fiscal deficits over the next three years, they’ll probably remain narrower than before the coronavirus pandemic, Fitch Ratings said on Monday.

“Israel continues to face high levels of internal social and political tension, and the advancement of certain policies favoured by the governing coalition could aggravate these strains and influence the sovereign’s rating,” Fitch said.