"If and when the Bank of Israel estimates that the exchange rate has diverged materially from the window that we have defined, it is certainly possible that we shall intervene in the market, and no-one will receive a warning letter from us beforehand," Governor of the Bank of Israel Amir Yaron said yesterday evening at the conference of the present governor and three former governors of the Bank of Israel (Karnit Flug, Stanley Fischer, and Jacob Frenkel) held by "Globes" at the Land of Israel Museum in Tel Aviv.
"I should prefer the exchange rate to be set by market equilibrium, and that was also the view at the bank in the period before I took up my post. In practice, there is a window of exchange rates that we consider to be consistent with price stability and economic activity, taking into account all factors and variables in the economy. This window is dynamic, and depends on constantly changing criteria, which in the nature of things ought not to be disclosed. In this respect, the Bank of Israel's exchange rate policy can be called constructive ambiguity, which is the appropriate policy for a small economy like that of Israel," Yaron said.
Last week, the Bank of Israel Monetary Committee decided to leave the central bank's key interest rate unchanged, but accompanied this with a message different from the one that accompanied interest rate announcements in previous months. "The message changed because the data changed," Yaron said. "In central banking jargon, it's called 'data dependency'. Within a fairly short time, we saw a drop in inflation, a change in the direction of monetary policy globally, a worsening of the risks to the global economy, and sharp appreciation of the shekel. We mentioned with satisfaction the fact that the local economy is in good shape, and indeed, if we look beyond the technical fluctuations we can see that the economy is growing at a good rate, the labor market remains tight, and it appears that for now the slowdown in the global economy has not filtered through to Israel, not even to exports, which continue to grow, mainly thanks to services.
"If the economy is in good shape, why did we state that to the extent necessary we will take expansionary monetary policy steps? First of all, because the inflation trend changed. It is not clear to us at this stage whether this is a matter of noise in the data - a loud noise, but noise - or whether there is a basic decline in inflation. It is clear to us, however, that we need to continue to strive to raise the rate of inflation towards the middle of the target range. Secondly, the risks have grown. To the extent that the risks materialize, we will want to act in advance, to prevent, as far as possible, a slowdown in economic activity. How will we do this? We have a variety of tools, and all of them are on the table. There are the standard tools, and we are refreshing the toolbox with regard to tools that have not been tried here, or have not been tried for a long time," Yaron said.
Yaron paid tribute to the achievements of each of the three of his predecessors who were present at the conference. He also talked about the housing market, and said that he had asked the Bank of Israel Research Department to formulate recommendations to help the new government to identify priorities and remove obstacles to expanding the supply of homes.
Published by Globes, Israel business news - en.globes.co.il - on September 2, 2019
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