With Lior Kagan, Golan Fridenfeld and Reuters

Staunching the devaluation of the shekel at its current rate is enough at the first stage, declare top officials at the Bank of Israel.

The shekel weakened over the weekend, passing the exchange rate of five to the dollar. After a surprise 1.5% rate hike on Sunday afternoon, it regained strength ¿ only to weaken again as buyers for dollars returned to the market in droves.

The shekel closed trade on Monday near its all-time low as the market shrugged off Sunday's surprise interest rate hike aimed at stemming the shekel's fall.

After opening at 4.92 per dollar the shekel gradually slipped, with its representative, or official, rate set at 4.9780 compared with an all-time low of 4.9910 set on Friday.

"The interest rate is not the main problem for the dollar going up," said Michael Rabinowitz, a senior dealer at Israel Discount Bank. "The market is worried about the security situation, the budget deficit, the economy in general and worries Israel's credit rating will be lowered by the ratings agencies.

"The central bank is trying to halt the depreciation caused by all these problems but raising interest rates is only a small step. It's not a solution to the problem," Rabinowitz added.

Pundits are predicting yet another rate hike soon, although the Bank of Israel has raised its key lending rate by 2.5% in less than two weeks to 7.1%. Bank officials say that there is no specific exchange rate at which the governor might do so. The central bank is due in any case to announce another rate decision in two weeks.

"The goal is to halt the spikes of devaluation, and to reduce inflation expectations," say bank officials.

Rabinowitz said a further rate rise was possible but its effects could once again be negligible. "If it didn't help once, why would it help the next time?"

The governor recently said that the central bank would ensure that inflation drops again to within the range set by government, 1% to 3%, and to restore stable prices.

However, the market has not been behaving as expected after the rate hike.

"The market has lost its faith in (Bank of Israel) governor David Klein," stated Rafi Cohen, head dealer of the Moritz Tuchler investment house.

"I believe there has to be a balance point where investors stop stampeding for dollars and consider whether the American currency is a good deal, given the interest rate on the shekel. Where is that balance point? That's a good question that I can't answer yet," Cohen said.

"If we look at other markets in crisis, such as Argentina and Turkey, we see that tough policy meant to stabilize exchange rates didn't really help. The indictors in the Israeli market, from the perspective of the governor's ability to control the exchange rate through interest, are starting to be similar."

Cohen's conclusion: Other means are required. Specifically, he recommends an issue of Gilboa bonds, in which principal and interest are linked to the representative exchange rate of the dollar known on the day the bond is issued.

"However, since the Bank of Israel governor and the finance minister don't really communicate, they didn't have the sense to do this a month ago," Cohen adds. "When the governor and the finance minister don't walk in the same direction, it looks like a wagon without a horse."

Meanwhile, the hostilities and the economic situation in the U.S. are pushing up the dollar in the local market, which is showing no signs of recovery, he assesses. And if the shekel continues to weaken despite the latest rate hike, Cohen predicts, another will come soon.

Zahi Elias, head of the spot desk at Bank Leumi, said strong volatility could be expected in the next day or two as the market looks for direction. "The (rate) rise in itself is not enough though. We need the government to take control of the budget deficit and we need a supply of dollars to the market through a bonds issue or other means. The market is short of dollars."