A day prior to the publication of Israel’s inflation report for May alongside an expected hike in interest rates in the U.S., Ynet spoke with Noam Shpalter, an economics professor at Tel Aviv-Yafo Academic College, on the inflation in Israel and around the world.
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Shpalter also shared his views on the significant weakening of the shekel amid continued legislation attempts to weaken the judiciary, and its expected impact on interest rates in Israel.
Regarding the sharp fluctuations in the foreign exchange market in the past two weeks, Shpalter argued that “the Bank of Israel’s 'no intervention' policy in the foreign exchange market is a clear indication for their intervention in said market.”
“Past experience shows that whenever an ‘invisible hand’ is involved, it usually represents a very large body, and sharp changes like the recent ones in the dollar-shekel exchange rate must involve intervention by the state,” he added.
“I don't see any institutional body in Israel that has an interest in making such moves, except for the Bank of Israel. When the Bank of Israel intervenes, it decides which way the wind will blow, and when it stops intervening, the market carries on.”
Shpalter also claimed, "My estimation, from a macroeconomic perspective based on past experience, is that the dollar can’t be so weak. I believe the dollar will return to around 3.8 shekels much faster than we think because ultimately, international trade is conducted in dollars. Israeli money leaves abroad, we see that on a daily basis."
On the upcoming interest rate hike in the U.S., Shpalter said, "I believe the Federal Reserve will halt the interest rate hikes. Should another hike occur, it’ll be the last one because the data indicates the beginning of an economic slowdown.”
“Inflation in the U.S. has significantly decreased, and many economists there are raising red flags, saying the government was raising rates too quickly and that the U.S. market won’t be able to withstand it,” he added.
"We should keep in mind that inflation arrives in delay after interest rate hikes - today's inflation is a result of rate hikes from the previous quarter, because the market takes time to react,” Shpalter explained. “This means we’ll continue to see a decline in inflation regardless of the announcement.”
Talking about the persistently high inflation in Israel, Shpalter said, "Bank of Israel Governor Amir Yaron is at a tight spot. On the one hand, Israel is in a much worse situation in terms of inflation compared to the U.S.”
“On the other hand, Israel is in a very sensitive situation. He has to make a decision whether to back down or continue, which is a risky move for the economy.”
"It’s important to remember that Israel has an island economy. Most of the food in Israel is imported, and when we face shipping and currency conversion issues, prices rise. Additionally, another issue that has to be talked about and will cause more problems is Israel’s housing market.”
“The sharp rise in interest rates affects and will continue to affect contractors, and the marketing industry, together with a historical shortage of apartments in Israel,” he said.
“I believe that when interest rates go down, we’ll see the market boom - contractors understand it, consumers understand it, investors understand it - everyone is sitting on the fence and waiting for the heat to blow over, and then we will hit the ground running."
According to Shaplter, "Long-term economic plans are required from the government because it needs to plan how to solves the housing crisis – using a comprehensive, well-budgeted framework.”
“Unfortunately, this government, both the opposition and the coalition, are engaged in substantial and important struggles, and regardless of the decision made – the economy will take a substantive hit."
Talking about Europe, where inflation continues to be one of the highest in the world, Shaplter noted, "Europeans don't have many options – they’ll have to raise interest rates. They’re still directly affected by the war in Ukraine.”
“As long as the war continues, the more effects it’ll have, and Europe needs to be seen differently from Israel and the U.S. because most international transactions in Europe are still done in dollars, not euros. They won’t have a choice but to raise interest rates to combat inflation.”