It was a year ago, in April 2009, that the Israeli public began to realize that the great crisis it had been expecting since September 2008, after the collapse of Lehman Brothers, was not about to happen. It took a few months until that feeling became a certainty, but the turnaround started to happen a year ago. Like the public at large, Governor of the Bank of Israel Stanley Fischer also understood that month that the black scenario he so much feared was not around the corner. Employment would not collapse, GDP would not shrink catastrophically, and the financial system would not be in real danger. This was the signal for a gradual change in monetary policy, leading to a doubling of the interest rate within 12 months.
Fischer was the first central bank governor in an industrialized country to raise interest rates after the financial crisis. Other look at him and at the Israeli economy and can only feel envious of the Israeli governor's position. The high reputation Fischer enjoyed before the crisis only rose yet higher, despite his abandonment of some basic articles of the central bank governor's faith, chief among them that a central bank intervenes in the foreign currency market only in emergencies.
A year ago, at the end of March 2009, the shekel stood at 4.188 to the US dollar, and 5.5736 to the euro. Yesterday, an exchange rate was recorded of 3.713 to the US dollar, and of 4.9905 to the euro. These numbers are a token of the storms that have hit the Israeli foreign exchange market in the past year and with which Fischer has tried to contend, with partial success. The foreign exchange market reflects very clearly the reality that Fischer and the public discovered a year ago.
Overseas investors started to pour money into Israel, while Israeli institutions reduced their exports of capital. The net debt of foreign investors to Israel grew from $43 billion at the end of December 2008 to $55 billion at the end of 2009.
The result was downward pressure on the exchange rate, threatening exports and domestic employment. Fischer decided that he could not remain indifferent. Intervention in the foreign exchange market became a "normal" activity for the central bank, and even the International Monetary Fund, which would urge any central bank governor who took similar action to desist, made do with tepid comments in Fischer's case.
The result of the intervention was clear: Israel's foreign currency reserves grew from $36 billion in September 2008 to $60 billion in November 2009. Fischer acknowledged many times that there was no possibility of preventing the shekel from appreciating over time, as long as the Israeli economy was growing faster than other economies. All he wanted was some measure of control over the rate and strength of appreciation.
So battles developed between the central bank and both overseas and local banks that gambled on rapid appreciation of the shekel. For six months now, Fischer has managed to keep the exchange rate fairly close to the level he considers vital. Meanwhile, exports continue to rise, and the news on employment is still good. Presumably, the interest rate hike Fischer announced a few days ago will add to the pressure on the exchange rate, but Fischer knows that he has already put the worst dangers behind him.
Published by Globes [online], Israel business news - www.globes-online.com - on March 31, 2010
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