The shekel-dollar exchange rate reached NIS 3.51/$ this morning. The exchange rate is creeping closer to the NIS 3.50/$ line, and even though it is an arbitrary line, it still may signal a need to take unprecedented steps to Governor of the Bank of Israel Dr. Karnit Flug.
The current exchange rate level effectively forces those who analyze the Israeli foreign exchange market to think about two things that happened at the beginning of November. The first is the formal statement made by the Czech National Bank, which initiated a devaluation of the koruna, the Czech currency, by 5%. The second was the conference of senior economists in honor of Prof. Stanley Fischer, the former Governor of the Bank of Israel.
Why is the Czech example relevant to Israel? Because the Czech Republic suffers from an exchange rate that, according to the heads of its central bank, is too low, and harms growth and employment. At the start of last month, the bank announced not only that it would buy euros on the market, but that its heads want to make sure that “the exchange rate of the koruna against the euro is close to CZK 27.” In other words, they went further than the heads of the Bank of Israel, who have been satisfied until now to buy foreign currency without setting a target rate. The central bank in Prague explained its methods to protect growth at a time when interest rates are near zero, and it is not possible to use the tool of lowering interest rates. In order to explain its intentions, the bank added another remark, according to which it would not allow the local currency to strengthen any more below the exchange rate that it set as the necessary rate for growth. The bank also said that it would act according to its announcement, and set no time or quantity limitations.
The Czech National Bank’s determination is demonstrated by its actions following the announcement. In the first two weeks of the program, the bank bought CZK 200 billion worth of foreign currency (€7.4 billion), and its balance sheet assets jumped by nearly a trillion koruna.
The same day that the Czech bank went into action, the International Monetary Fund (IMF) held a conference of senior economists in honor of Stanley Fischer, the man who already four years ago began setting the operational guidelines for a central bank, and brought growth and employment back to the center of the debate about monetary policy. There is no way to describe the actions of the Czech National Bank - or those of Israel, should it choose to take a similar path - without mentioning what is commonly called the “Fischer Doctrine.” The matter rose during the conference at the IMF when Prof. Larry Summers said that the zero-interest rates are not about to go away any time soon, and that this is a long-term phenomenon. What tools, exactly, does the central bank have at its disposal in such a situation?
The Czech National Bank answered this question, and, two years earlier, so did the Swiss National Bank, which took similar action, and set a target low for its exchange rate. Luckily for the Israeli economy, it does not seem that the Bank of Israel has changed the former governor’s policy, and his intellectual legacy continues to guide the heads of the bank.
Published by Globes [online], Israel business news - www.globes-online.com - on December 2, 2013
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