Yaron has no bullets in his gun

Amiram Barkat

The market sees the Governor of the Bank of Israel's failure to use the market intervention weapon as weakness.

The hawk is, as is well known, a bird of prey. But in interest-hungry financial markets, the most dangerous thing that can happen to the governor of a central bank is to be labelled "hawkish". The slightest whiff of an intention to raise interest rates is enough to set off a wild rush to buy the local currency.

This week, it happened to Governor of the Bank of Israel Amir Yaron. For the first time since he took up the post, Yaron found himself alone in the town square, with the shekel behind him, and in front a frenzied mob of investors trying to get to it. A few statements about the possibility of an interest rate hike, and a stubborn member of the Bank of Israel Monetary Committee who wants a hike immediately, were enough to ignite the fire. A series of Buy recommendations from overseas banks fanned the flames and whipped up investors' enthusiasm.

Yaron did what the sheriff is expected to do. In an extraordinary statement he said on Wednesday that he would not raise interest rates for "an extended period of time". This was a risky gamble. What happens if, in a few weeks' time, circumstances change and an urgent need for an interest rate hike arises? Should that happen, Yaron will be liable to pay the highest price in the Wild West: loss of personal credibility.

Fortunately for Yaron, another sheriff turned up yesterday and diverted the stampeding herd towards himself. The US Federal Reserve, which cut its interest rate by less than expected, became the hawk of the moment, and the shekel was saved. But some of the veteran residents of the township are worried. Yaron drew the wrong gun, they say. Instead of the interest rate gun, he should have drawn the other weapon the central bank governor carries: intervention in the markets. Yaron said in the statement that the Bank of Israel has "other tools", but if he did not intervene and buy dollars when the shekel-dollar rate broke through the NIS 3.5/$ barrier, then when will he? The markets detect that Yaron doesn't want to use the intervention tool, and interpret that as weakness. If you need to shoot and don't shoot, then you presumably have no bullets, the other gunslingers say to themselves.

Published by Globes, Israel business news - en.globes.co.il - on August 1, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

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