• The analysis examines the impact of monetary policy and its communication on the shekel-dollar exchange rate and the uncertainty regarding it. It focuses on assessing the effects of changes in the Bank of Israel interest rate and the publication of the Research Department’s macroeconomic forecast, particularly when they deviate from market expectations and surprise the market.
  • Interest rate decisions and their accompanying communication affect the exchange rate asymmetrically: A reduction in the interest rate has a greater impact on the exchange rate than an increase. A possible explanation for this asymmetry is that when the interest rate deviates from market expectations, it increases uncertainty, raises the exchange rate premium, and leads to a depreciation of the shekel. This depreciation partially offsets the appreciating effect of an interest rate increase while amplifying the depreciating effect of an interest rate decrease.
  • Interest rate decisions that are accompanied by a forecast publication and a press conference reduce uncertainty regarding the exchange rate, as reflected in the implied volatility of shekel-dollar options, compared to interest rate decisions without a forecast publication. However, when the forecast for the interest rate one year ahead deviates from the market’s expectations, the reduction in uncertainty is smaller.
  • The findings of the analysis highlight the importance of transparency and information provision by the central bank, including the publication of forecasts and the holding of press conferences, in reducing uncertainty in financial markets.

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