The IMF delegation that visited Israel this week left two recommendations for the government and the Bank of Israel. Firstly, the Minister of Finance should start taking steps towards adjusting the budget in order to narrow the fiscal deficit and reduce the public debt. Secondly, the Bank of Israel should start thinking about a future exit from intervention in the foreign exchange market, when conditions justify it.
For the time being, the delegation members said, the Israeli economy is proving to be among the strongest, and so the steps required are more by way of prevention and course adjustments than dramatic steps. That just about sums up the delegation's remarks. Anyone who reads them will find no special concern about inflation, and it is doubtful whether that would have changed in the light of November's 0.3% inflation figure.
What's more, the Bank of Israel has revised downwards the State of the Economy Index for the past few months. This means that local recovery is slower than was previously estimated, and demand in Israel is not growing all that fast. To put it simply, the real economy too provides no cause for thinking about raising interest rates or about inflation dangers.
There is another reason, perhaps the most important one, that is likely to persuade Governor of the Bank of Israel Stanley Fischer to put aside the interest rate weapon: the foreign exchange market. In the unequal battle between the governor and those who gambled on the shekel appreciating, Stanley Fischer has one outstanding advantage, or at least he has had in the past few weeks. This week, he took care to send another message to all those entities that sold large amounts of dollars and signed contracts against the US currency. On the day the IMF delegation recommended him to start thinking about a date for ending intervention, he bought $100 million on the foreign exchange market, and prevented the local currency from appreciating.
This reflects the order of priorities in monetary policy. Anyone who continues to gambles on an appreciating shekel, and has a large exposure to a weakening of the shekel and a strengthening of the dollar, should ask himself whether the governor's recent actions don't confound his expectations.
The governor is in no great hurry, he has no special exposure that he has to cover, and no-one is pressing him to stop intervening in the foreign exchange market immediately. If the dollar continues to strengthen rapidly on world markets, he can close his intervention portfolio quietly and after a few weeks get back to the daily routine of a central bank, which consists of ensuring price stability.
Published by Globes [online], Israel business news - www.globes-online.com - on December 17, 2009
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