Impact of ILS strength on Israel economy

The BoI appears to be particularly concerned about the economic impact of ILS strength. The statement notes the ILS appreciated last month, and the cumulative appreciation this year is 5.9%. As per the statement, this "is weighing on growth of exports and the tradable sector, and is delaying the return of inflation to within the target range".

The BoI's reluctance to take additional action in easing monetary policy further despite worries about deflation and growth has been disappointing to the market. Also missing from the BoI's statement was any mention about stepping up FX interventions in the face of ILS's stubborn strength. 

The ILS has appreciated about 60bp on the day, potentially reflecting market pre-positioning for a dovish BoI statement. The passive approach by the BoI of maintaining low rates will only slowly weaken the ILS over time and will be largely driven by broad USD strength. 

"Although expectations of a Fed lift-off remain under-priced by markets, a near-term trigger appears to be data-dependent, there are some downside risks to our forecast for USDILS 4.00 by year-end 2015 but remain comfortable with the medium-term forecast of 4.14 in Q2 16. Long USD/ILS spot is recommended", says Barclays.