Another nail will shortly be driven into the coffin of the mid-line. It will take the form of a change in manner of marking the map grid reference point of the current rate of exchange. Hitherto, the Bank of Israel, in its official announcement, would in practice equate the exchange rate with the median rate. From now on, the exchange rate will be equated directly with the upper and lower limits of the fluctuation band. This is because, within the new fluctuation range, it will be difficult to extrapolate the distance from either extreme, based merely on the deviation from the mid-rate.
Previously, the mid-point was set at a fixed distance (7% upward and downward) from the limits. From now on, the mid-point will lie at a constantly increasing distance from the limits. This is because of the new, conical shape of the fluctuation band, resulting from the unequal gradients of the upper and lower slants. The lower section of the band climbs at an annual rate of 4%, while the upper section runs faster, at a rate of 6%. The mid-line between the two rises at a gradient of 5% per annum.
The slant gradient was not arrived at in random fashion. As previously defined, the uniform gradient of the entire slant derived from the difference between Israel’s target inflation rate and foreign inflation rates. The message now conveyed by the three separate gradients is rather more complicated.
The lack of clarity regarding the function of the mid-line takes a severe toll on its intuitively-perceived significance, whereby it is perceived as a sort of centre for the exchange rate mechanism. This sense of a loss of significance is also reflected by Bank of Israel publications. The mid rate, that regularly appeared in the daily series of exchange rates of the fluctuation band, is conspicuous by a its absence to this very minute. This omission seems to tell users: the mid-line no longer exists.
While the mid-line is being erased from public awareness, the upper and lower lines are becoming more important. But the upper line has long since been irrelevant. In practise, since the beginning of 1995, the basket exchange rate has always been below the mid-line. Since mid-1996, it has spent most of the time close to the lower limit of the band. Which actually indicates that the guiding line now is the lower line. The lower line is the line that is stuck in people’s heads, and nothing but a dramatic turnaround of expectations will cause them to abandon it. This line predicates devaluation at a minimal rate of 4% per annum.
The events of recent days have promoted the basket to the point of completing its annual quota, from the point of view of the lower limit, namely a 2% devaluation, and a position slightly beyond that predicated on December 31, 1997. The economy is now at one of its most interesting testing points in the foreign currency market. The next few days will show whether
progress can be made toward dissolving the psychological hold of the lower fluctuation band limit or whether, after a certain correction, the exchange rate will continue to limp downwards.