BoI Deputy Governor: If you sold dollars, tough luck

Andrew Abir

Explaining the Bank of Israel's decision to buy $30 billion, Andrew Abir spoke of providing certainty and protecting jobs. Market sources: It's a game changer.

"We decided that we will buy $30 billion on the market in 2021," Deputy Governor of the Bank of Israel Andrew Abir said today. "The reason for that is to provide certainty, so that anyone who buys or sells can obtain information for making a decision. We're giving certainty to everyone, not just to speculators but also to exporters and importers and financial institutions hedging their investments," Abir continued. Speaking at a briefing for reporters following the Bank of Israel's dramatic move, Abir sought to make clear that the Bank of Israel had no intention of deviating from the planned volume of purchases, which will raise Israel's foreign currency reserves to $200 billion.

"Let there be no uncertainty, we will buy the entire $30 billion in 2021. The current situation is exceptional, and so we announced an exceptional measure. It makes no difference to us if the reserves are $150 billion or $200 billion. If anyone sold dollars the other day, I'm sorry, tough luck," Abir said. In this context, Abir pointed out that in the short time since the announcement of the new measure, the shekel-dollar exchange rate had jumped from NIS 3.11/$ to NIS 3.19/$. This, he said, was because people had closed stop-loss positions. Foreign exchange market players told "Globes" that the Bank of Israel's move was "nothing less than a game changer".

Abir explained that the shekel's unusual strength against the US dollar was liable to hurt Israeli exports, and to lead to companies becoming insolvent or transferring their activities overseas. "We are not prepared to let the exchange rate determine workers' livelihoods," Abir said. "Faced with that, I'm prepared to take the risk that the shekel-dollar rate will rise. I have no problem in continuing to buy dollars even at NIS 3.30/$, NIS 3.40/$ and NIS 3.50/$."

Asked how the sum of precisely $30 billion was arrived at, Abir replied that the central bank's Monetary Committee had decided on the amount with reference to the foreign currency reserves ($170 billion at the end of 2020) and the volume of direct inward investment in Israel (some $40 billion in 2020).

"We are in doubt over whether the coronavirus pandemic and its effects will end soon, even if the most optimistic forecasts are borne out. And we don't want the exchange rate to be a burden on the economy and distance us from the inflation target. When inflation is negative, it depresses the real interest rate and reduces support for monetary policy," Abir said. Asked whether the Bank of Israel's step had any precedent, Abir mentioned the bank's announcement in 2009 that it would buy dollars in the context of the gas plan, although that program involved buying just a few billion dollars annually. He also pointed out that the central bank of Chile had announced a similar measure within the past few days.

Asked whether the Bank of Israel had decided on the move under pressure from manufacturers, Abir replied, "We have a dialogue with many sectors of the economy and certainly the exporters feel threatened and are also talking to the government to see whether it can help them. It's true that the US dollar has weakened against other currencies as well, but the shekel has strengthened considerably more than other currencies. Some of the reasons for that are good, and some are temporary. The collapse of imports meant a higher current account surplus, and we expect that imports will recover. It's not certain that cash flows from the high-tech industry will be so high if there is risk on Nasdaq. We don’t want to reach a situation in which the exchange rate determines the fate of firms.

"We are in an unusual situation of double-digit unemployment and negative inflation, and the Bank of Israel is committed to achieving the goals set by the government in the Bank of Israel Law, the inflation target and support for growth," Abir added. "If we are going to err, we want to err on the side of too much expansion rather than on the side of too little expansion."

Published by Globes, Israel business news - en.globes.co.il - on January 14, 2021

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

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