Israel central bank in focus as judicial reform plan hits shekel

By Steven Scheer

JERUSALEM (Reuters) -Israel's shekel was largely unchanged against the dollar late on Wednesday, recovering from further falls in the currency that some say could spark central bank intervention, as investors fret over a plan to overhaul the country's judiciary.

The shekel stood at 3.633 per U.S. currency at 1515 GMT, after softening more than 1.5% at one stage to 3.69, its lowest since March 2020 and after weakening 1.6% on Tuesday. One strategist at an Israeli bank said the afternoon bounce-back stemmed from exporters taking advantage of a higher dollar.

Since hitting a high of 3.34 on Jan. 25, the shekel has slid nearly 10% on talk of local firms pulling bank accounts from Israel and foreign investors staying away due to the government's proposed judicial changes.

BofA Securities economist Zumrut Imamoglu said that while political noise does not usually impact Israeli assets or economic policy, "this time is different".

"If this sentiment continues, we expect further shekel depreciation. The Bank of Israel could intervene in the currency rather than increase its policy rate further, as it is close to ending its hiking cycle, and hikes usually have little effect on the currency when the underlying factor behind depreciation is confidence," he wrote in a note to clients.

The government's reform plan would give it greater sway on selecting judges, while limiting the Supreme Court's power to strike down legislation. New bills that received preliminary approval in parliament on Wednesday included one that would bar the Supreme Court from intervening in ministerial appointments.

"The weakening shekel trend will most likely continue as long as no reasonable compromise is reached," said Jonathan Katz, chief economist at Leader Capital Markets, adding that foreign exchange intervention was possible to "smooth out sharp volatility", but was not a tool preferred by the Bank of Israel.

The central bank, which declined to comment on Wednesday, has bought tens of billions of dollars over the past 15 years to prevent the shekel from strengthening too quickly and its forex reserves stand at $201 billion.

"If this (shekel depreciation) continues rapidly, we could see the Bank of Israel hiking rates to 5% in the next rate decision (April 3), and possibly earlier," Katz said.

With Israel's annual inflation rate at a more than 14-year high of 5.4% in January, policymakers voted to raise the benchmark interest rate by 50 basis points on Monday to 4.25%, its eighth hike in a row. Yet, this was overshadowed by the judicial plan passing its initial vote.

Following Monday's parliamentary vote, Citi said it was going long dollar-shekel, targeting 3.95 to the dollar.

Critics say Prime Minister Benjamin Netanyahu - who is on trial on graft charges that he denies - is seeking legal changes that will hurt Israel's democratic checks and balances, enable corruption and bring diplomatic isolation.

Proponents say the changes are needed to curb what they deem an activist judiciary that interferes in politics.

Government bond prices fell as much as 0.7%, while the main Tel Aviv-125 share index dipped 0.5%, with both bonds and stocks also recovering from sharp early declines.