Early this morning the Bank of Israel announced a program to sell up to $30 billion of its foreign currency reserves in order to strengthen the shekel during the war against Hamas in Gaza, which is weakening the Israeli currency, which has already been depreciating this year.
In explaining the program, Bank of Israel Markets Department head Golan Benita said, "The bank will operate in the coming period in the market as part of the plan to moderate shekel exchange rate volatility. In addition to this plan and if necessary, the bank will provide liquidity to the market through SWAP mechanisms of up to $15 billion."
This is the first time since the introduction of a free market that the Bank of Israel is selling foreign exchange reserves. "Before we started intervening, the dollar exchange rate reached NIS 4/$, so the reference point is a rate of close to NIS 4," said Benita, predicting criticism of why the dollar exchange rate remains high despite the unusual intervention of the Bank of Israel.
He added, "The Israeli economy is strong and stable. We have no doubt that it will be the same this time and that it will be able to recover. We will use all the tools at our disposal in order to mitigate the effects of the security crisis. Yesterday we launched a program of repo loans to institutional bodies and mutual funds against government and corporate bonds in order to provide shekel liquidity, and we will continue to operate in the market as long as necessary."
Benita said the Bank of Israel conducts ongoing evaluations of all economic indicators since the security crisis began. "Such a security event also has economic effects, among other things on the markets which are volatile and on the shekel which is depreciating. The bank will operate in the coming period within the framework of the plan and the emphasis is to moderate and provide the required liquidity, and not to produce a certain exchange rate. The level of the State of Israel's reserves is high by any standard, and by international standards. This is to allow liquidity in the markets. The high level of reserves has been criticized, but even those who criticized it understand today that it allows the Bank of Israel to act."
Will the program succeed?
Benita said, "We don't measure success just a few hours after it has begun, but over time whether it allows normal functioning. For now, the initial effect so far seems to be positive. Given the extreme situation in the south, the dollar exchange rate is hovering around NIS 3.92/$ with low volatility, much lower than we estimated. As I mentioned in preliminary trading, the dollar had already touched NIS 4/$, and we heard from market traders that the program produced an effect on other markets and produced stability on the stock market as well as in the bond market."
The Bank of Israel has previously said that since the beginning of 2023, it has identified an excessive devaluation of about 10% in the shekel exchange rate due to the political uncertainty in Israel.
Benita explained, "We have not seen fit to intervene in the market until now because we realized that the market is repricing Israel's risk premium and this is reflected, among other things, in the exchange rate. Today we are taking a preventive step that could have brought us to a different situation in the foreign exchange market. We are in unprecedented security circumstances and the assessment was that the market could reach a different situation. "During overnight trading in Asia, the exchange rate reached NIS 4.2/$ and even NIS 4.3/$ shekels to the dollar, therefore it was important to increase certainty in the local market in order to mitigate as much as possible overreactions in the market."
On the question of a shekel liquidity crisis, the plan is designed to prevent such a situation. "We are still at the beginning of the event and it is difficult for us to assess where the security situation will take us and also what the impact on the markets will be. The impact on the markets is indeed sharp, but it has not reached extremes. There was a fear of large redemptions in the mutual funds and provident funds, as in the Covid pandemic, which would have led to a large sale of corporate and government bonds. The very fact that we made it possible for the funds to carry out a repo transaction allows their managers not to sell assets and thus allows the market to stabilize."
The Bank of Israel set the shekel-dollar rate 1.27% higher today at NIS 3.91/$. In afterhours trading the shekel weakened a further 1% to NIS 3.955/$.
Published by Globes, Israel business news - en.globes.co.il - on October 9, 2023.
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