It looks like Governor of the Bank of Israel Prof. Stanley Fischer has decided to leave his successor with a clean desk when it comes to interest rate policy. Fischer decided, even though he in the closing days of his term of office, that he has the authority and the ability to lower the domestic interest rate to 1.25%, despite all the significance this might have for inflation and possible impact in the real estate sector.
It must be remembered that the Governor thought that there was a need to lower the rate by 50 basis points earlier this month but in the end made do with a 25 basis points cut. It can be assumed that in Fischer's eyes, a devaluation of the 3.2% by which the shekel has weakened since the previous rate cut was announced, was not enough, and the exchange rate must be pushed further up. He did not feel it was possible to wait with the decision.
In effect, when it comes to taking decisions about the rate, Fischer has relieved his successor from having to confront the question of interest, the exchange rate and inflation, in his or her first weeks in office. There are of course other ways to view the decision such as to assume that Fischer does not trust his successor to take such a complex decision in a new job, and a situation in which the economy is not meeting its targets.
In effect, Fischer is working in a situation of uncertainty regarding who will be his replacement. In the bizarre world of Israeli political decisions, there is no guarantee that what Fischer is told in private will actually happen when the time comes to officially reveal the identity of his successor. Therefore, Fischer cannot be sure what will be the considerations of his successor and so he decided to act, and take professional responsibility for the measures.
In these circumstances, the question that must be asked is will his successor agree or at least go along with Fischer's decision, and continue to act to weaken the shekel.
In actual fact, many decisions by investors on the financial markets in the coming weeks will depend on this question. Will the next governor continue on the path set out by Fischer, or decide to press the brakes and put monetary policy into reverse - and if so to what degree?
All the while that the mist does not clear over the next governor's identity, these questions cannot be clearly answered, somewhat blunting the effectiveness of the latest rate cut. If the players in the financial markets are persuaded that there won't be a change in monetary policy, then Fischer's measures will be felt in all their power in the foreign exchange market. However, if there is the belief that a less "interventionist" governor has arrived who is concerned that the interest rate is too low, then the developments in the coming few months will reflect this belief.
Published by Globes [online], Israel business news - www.globes-online.com - on May 28, 2013
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