"You don't measure the success of our intervention in the forex market by one day. None of the know-it-alls giving us advice really know what's happening in the market and how we're using our tools, so don't take what they say too seriously," newly appointed Deputy Governor of the Bank of Israel Andrew Abir told "Globes," referring to the controversy over the foreign currency market and the low levels of the shekel-dollar and shekel-euro exchange rates.
Two months after the Bank of Israel began intervening in the foreign currency market, it appears that its efforts are having no effect. The shekel-dollar exchange range fell to nearly NIS 3.40/$ yesterday, even though the dollar gained ground against all of the world's other main currencies. The shekel-euro exchange rate hit an 18-year low of NIS 3.73/€. The Bank of Israel is in the eye of the storm, and is subject to growing pressure. National Economic Council chairman Prof. Avi Simhon, a consistent critic of foreign currency purchases, joined the critics today.
"Globes": Why did you ask for this interview?
Abir: "The main reason is that there's a lot of fuss. People are starting to talk, and each of them has expansive advice for the Bank of Israel. We want to make it clear that the exchange rate policy and the tools that we're using are part of the Bank of Israel's monetary policy. The Monetary Committee is the one who decides on the tools, not a bunch of people being interviewed in the press. Our policy is not a matter of a day or two, a week, or a month. Our policy is forward-looking. We have patience, and we're not influenced by any headline on Wednesday or Thursday. We wanted to tell the market that we're not using tools for a day or two in the long term. We won't be influenced by a media headline or what someone posted on the Internet. We look at what's happening in the economy in general, not just the exporters, importers, or business, and set the monetary policy accordingly. You could say that the monetary policy that the Monetary Committee has been practicing for several years is an expansionist policy that helped the economy cope with the difficulties in recent years, and is responsible for the good state of growth - better than in most places in the world."
One of the know-it-alls you are talking about is probably Prof. Avi Simhon, chairman of the National Economic Council, who said today in a Galei Tzahal (Army Radio) interview that the intervention in the foreign currency market has already cost the Bank of Israel tens of billions of dollars in losses.
"I'm not responding to any specific statement, but you can say that we certainly have no losses. The cash flow within the Bank of Israel's balance sheet is positive. The total return on the balances is higher than on the short-term loans that we issue in order to counter our intervention. Our balance sheet is much better than it was a few years ago. We're able to invest in assets with a higher return than our liabilities, so we don't see any kind of pressure from the side of the balance sheet. The 6% return in 2019 was high, and the return on the portfolio of the balances in the past three years is far higher than the costs of the shorter short-term loans that we issue."
Simhon is wrong when he says that you've lost many billions because of the shekel appreciation?
"It's only on paper. When we sell the balances, it will be at big profits, as I have explained several times in the past. We don't want to be in such a position, because it means that the economy has a problem (Abir is hinting at a crisis situation in which the Bank of Israel has to sell the balances because of a loss of confidence in the shekel and depreciation in its value, A.B.)."
But you intervened in the foreign currency market on an almost unprecedented scale. You have bought over $8 billion since mid-November, and the shekel is still getting stronger anyway. The shekel-dollar exchange rate has fallen to NIS 3.40/$, and the shekel-euro exchange rate is at its lowest point in 18 years. Maybe it is simply not working.
"This is too short a period to judge whether or not we have succeeded. We have no specific exchange rate target. We want to moderate sudden changes in the foreign currency market in order to enable players in the economy to get used to a certain exchange rate. The fact that the exchange rate is low on a particular day doesn't mean that we'll stop. We're still conducting an expansionist monetary policy."
Is this the purpose of your interventionist policy? To buy time to enable economic players to get used to excessive steep changes in the exchange rate?
"And to guarantee conditions that will enable the economy to continue growing at close to its potential, meaning close to 3%. Keep in mind that we're in a period with a lot of questions about a slowdown in global economic activity as a result of the coronavirus."
"The market will realize that we aren't changing the policy"
The Governor of the Bank of Israel told "Globes" last month that he had no intention of cutting the interest rate in order to weaken the shekel, and that the right tool for this was, and would remain, foreign currency purchases. Expectations of an interest rate cut at the Monetary Committee's next meeting have nevertheless increased in the market in recent days. For example, one-year and two-year bonds are now being traded at yields of 0.15% and 0.16%, respectively, a little over half of the Bank of Israel's current 0.25% exchange rate.
The market is currently pricing a 50% probability of a cut in the interest rate at the upcoming Monetary Committee meeting two weeks from now. At the same time, players in the market are selling dollars, under the assumption that even if the interest rate is cut, it will not change the shekel strengthening trend. Is this affecting and changing your announced policy of continuing foreign currency intervention and not lowering the interest rate?
"There's no change. We made it clear at our latest meetings that we prefer the intervention tool over the interest rate cut tool at this time, and we certainly don't want a negative interest rate. That doesn't mean that we don't reassess the situation at every meeting."
What about the market's expectation of an interest rate cut?
"I won't comment on that."
The Bank of Israel is not the only institutional player in Israel operating in the foreign currency market. Pension savings concerns are operating in the market on at least the same scale when they hedge their investments in foreign currency against the strengthening of the shekel.
The investment institutions have reduced their foreign currency exposure by $4 billion in recent weeks. This also offsets your intervention, and delivers a message that they do not believe that you will manage to stabilize the shekel exchange rate.
"The vigorous activity by the investment institutions late last year and early this year was an adjustment of their portfolios to the steep rises in the foreign currency assets caused by higher stock prices. They're cashing in some of their profits. We can already see that this flow is slowing, and we don't think that this will cause continued shekel appreciation."
Maybe your lack of clarity about the policy of intervention in foreign currency is coming at the expense of your credibility among large players like the investment institutions.
"I think that the market will realize that we're not changing our policy - that it is credible.
Published by Globes, Israel business news - en.globes.co.il - on February 13, 2020
© Copyright of Globes Publisher Itonut (1983) Ltd. 2020