The shekel: What's changed between 2008 and now?

shekel  / Photo: Shutterstock,

The Bank of Israel's reasons for foreign currency purchases are different from what they were in the global financial crisis, leading to a different outlook.

The main job of the Bank of Israel, besides being the economic adviser to the government, is to maintain price stability while also maintaining stability in the banking system. These functions are mainly fulfilled through the setting of the interest rate each month, but also through direct purchases and sales of foreign currency on the market in order to control fluctuations in the shekel exchange rate.

The Bank of Israel started to buy foreign currency in early 2008, before the global financial crisis of that year broke out, in order to increase its foreign currency reserves, which then totaled $30 billion. During the subprime crisis, the Bank of Israel bought foreign currency regularly, but after that it intervened on the market only when there was exceptional movement in exchange rates. In 2008, then Governor of the Bank of Israel Stanley Fischer took the view that the situation was one of market failure arising from the global crisis - fear was making Israelis bring money back home. Today, thirteen years later, it's hard to say that there's a market failure.

Attempt to halt rapid appreciation

As in the subprime episode, at the height of the financial crisis last year when the coronavirus pandemic broke out, the rush to the dollar caused a shortage on the local market, to the point that the Bank of Israel was compelled to intervene and supply liquidity to financial institutions. The global crisis of 2008 strengthened investors' perception that Israel was a stable economy and that the strength of the shekel mainly reflected positive balance of payments figures. The same applies today, with Israel perceived as an island of stability as its currency strengthens.

In general, since 2009, the Bank of Israel's motives have not changed much, as it attempts to halt too rapid an appreciation of the shekel, in order to assist exporters in the face of the growing forces tending to strengthen the Israeli currency. In early 2013, as natural gas started to be produced from the Tamar reservoir, the Bank of Israel announced a further foreign currency purchasing plan, with the aim of offsetting the strengthening effect of the natural gas flow on the shekel.

At the beginning of this year, the Bank of Israel launched a $30 billion foreign currency purchasing program to deal with an influx of foreign currency that was causing the shekel to appreciate, thus making Israeli exports dearer. The Bank of Israel has already purchased more foreign currency than the quota that it set for the year, but that does not mean that it won’t continue to intervene in the market. In October, the rate of purchases slowed; the Bank of Israel purchased only NIS 1.7 billion to moderate the appreciation of the shekel, compared with an average of NIS 5 billion monthly in the first half of this year.

Excess currency reserves

Israel's foreign currency reserves grew to a record $217 billion following the Bank of Israel's purchasing spree, which amounted to 60% of the reserves in the decade to 2020. The reserves are now far in excess of the target that the Bank of Israel set of $110 million. The reserves are an emergency stock of foreign currency in case of a crisis such as war.

What can be expected on the foreign exchange market now? The basic factors causing the shekel to appreciate will presumably continue to apply. So far this year, the shekel has appreciated against all the world's main currencies, and has depreciated only against the Russian ruble, which has been boosted by a combination of a global boom in energy prices and a series of interest rate hikes.

The picture could change later on, however. The inflation figures released in the US last week were higher than projected: the inflation rate was 0.9% in October and 6.2% for the year to the end of that month. This figure represents a challenge to the tendency at the US Federal Reserve to see the inflation as stemming from temporary factors, and it is not inconceivable that an interest rate hike in the US will come earlier than expected. That would strengthen the dollar against other currencies, including the shekel, which could make life easier for Israeli exporters and give the Bank of Israel some peace, unless it too raises its interest rate. The Bank of Israel has, however, made it clear that it sees the current bout of inflation as a temporary phenomenon, and that its interest rate will remain low for a while yet.

Published by Globes, Israel business news - - on November 14, 2021.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2021.

shekel  / Photo: Shutterstock,
shekel / Photo: Shutterstock,
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