“The Bank of Israel’s policy regarding the dollar has been relatively successful until today, but must be considered anew and adapted to the new circumstances,” a senior source in the financial system told “Globes” after the US currency dropped beneath the psychological threshold of NIS 3.5/$. This follows the US Federal Reserve’s announcement that it will start tapering its bond purchasing program.
According to the source, “The Bank of Israel has employed the same policies for five years already, and it seems they have reached the end of their road.”
Last Wednesday, the US Federal Reserve announced that it will taper its bond purchases in the open market, but that, in parallel, interest is expected to remain near zero for a long time. Following the announcement, the dollar strengthened slightly against the shekel, but then began weakening again.
Under former Governor of the Bank of Israel Stanley Fischer, the Central Bank employed a policy of discreet intervention when there was volatility in the nominal effective exchange rate (unadjusted weighted average value of Israel’s currency relative to the currencies of Israel’s primary trade partners) that could not be explained by market forces. Currently, the Bank of Israel is consistently refusing to adhere to this policy, and is ignoring the crisis facing exporters and its possible effects on the economy. The Bank of Israel points out that the dollar’s effective exchange rate has not changed significantly since May.
According to the same senior source, there are several possible ways to act: “One way,” he says, “is to set a floor for the exchange rate. However, this is dangerous process, because it does not allow for its results to be blurred, and it puts the Bank of Israel’s reputation and credibility on the line.”
According to him, in order to take such a measure, wall-to-wall support would be necessary, from all sources related to fiscal policy - the Ministry of Finance, the Prime Minister, and the Knesset. “A strong, unified front is required to implement such a policy,” he says.
However, “Globes” was informed that there are objections to the idea at the Bank of Israel, particularly around Governor of the Bank of Israel Dr. Karnit Flug.
Another means he suggested is to halt intervention and to “allow the rate to reach its level.” But, in such a case, he emphasizes, “We don’t know what the rate will be, or what the consequences will be for the Israeli economy, exporters, and the manufacturing sector.” He also raises the possibility of “thinking outside the box,” and says that “to the extent that the problem is rooted in exports and the competitiveness of Israeli services and products in the world, we must take steps that won’t disrupt the whole macro-economic system, and extend special aid to the export sector,” but, he adds, “This aid must be extended without violating international agreements.”
Regarding the question of what is behind the continued strengthening of the shekel versus the dollar, he says: “There is the effect of the [natural] gas, alongside our success in exports. Fischer always said it is hard to attain a strong economy and a weak currency. Moreover, Israel is attractive for investment. That said, I don’t think the issue here is extensive speculation, as a few market sources have described.”
Inflated rate
The senior source’s statements join the idea that Bank of Israel Monetary Committee member Prof. Alex Cukierman shared with Bloomberg. “Setting a floor for the dollar is a policy that I would not reject out of hand,” Cukierman said, breaking the taboo, and standing up as the first formal source who agreed to address the burning issue “on the record.”
Cukierman qualified his statements and explained that this is a step that should only be considered in “extreme situations,” as a result of sharp shekel appreciation, but did not specify what an “extreme rate” would be.
The Monetary Committee member also said that there are tools that he would prefer to employ first, for example, imposing taxes (what he called fiscal measures), in order to slow the short-term flow of capital.
Cukierman also admitted that the shekel-dollar exchange rate is inflated, and said that a significant part of the shekel’s appreciation over the past year is temporary, and not a direct result of fundamental market forces.
Last week, the Central Bureau of Statistics published a report on the balance of payment current account, according to which a sharp drop was recorded in the third quarter of 2013 - from a surplus of $1.5 billion to a deficit of $300 million in the current account. Such a drop should have caused a sharp depreciation of the shekel, but did not.
Exporters and manufacturers are calling upon the Bank of Israel to set a minimum rate, at least for the short term, until the long-term measures take effect and begin to show real signs that they are working.
The pressure was redirected towards Minister of Finance Yair Lapid, who is very troubled by the goings on in the foreign currency exchange and their impact on exports, and in recent weeks he has held numerous discussions that revolved around the issue of the “dollar floor.” However, the topic has been dropped from the Ministry’s agenda.
The Bank of Israel and the Ministry of Finance declined to comment on the report.
Published by Globes [online], Israel business news - www.globes-online.com - on December 25, 2013
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