The Bank of Israel's intervention in foreign currency markets led to the depreciation of the shekel, and thus achieved its goal, says a new report released yesterday.

The report, entitled "Did The Bank of Israel Affect the Exchange Rate?" was written by Avihay Sorezcky of the central bank's research department.

In March 2008 the Bank of Israel started buying fixed amounts of foreign currency on a daily basis. It started with about $25 million a day, and in July 2008, it upped the ante to about $100 million a day. In August 2009, it switched to ad hoc purchases.

The largest effect on the nominal shekel-dollar exchange rate came after the pace of purchases increased in July, states the report, after which point the gap between the actual dollar-shekel rate and the forecasted rate rose to more than 10%. The effect of the intervention, states the report, ranged from a 1.7% depreciation in May 2008 to a 11.4% depreciation in November 2008, and later 6% in February 2009.

This gap started shrinking at the end of 2008 and disappeared completely in the first half of 2009. When the Bank of Israel changed its policy and began surprising traders with unannounced purchases, the gap reappeared.

The report calculated the effect of the purchases by comparing the exchange rate forecasted by an econometric model with the actual exchange rate during the intervention period. Before performing the comparison, the report addressed the quality of the model's forecasts, and found them to be good.

The research compared "the dynamic and static forecasts of the exchange rate, using an unrestricted value-at-risk model estimated using the Bayesian method, with the actual exchange rate in the intervention period."

"The volatility of the shekel's exchange rate worries the Bank of Israel, but the Bank of Israel will not set a rate it will defend as a red line," said Bank of Israel Governor Stanley Fischer yesterday. He was speaking at the annual conference of the Israel Export and International Cooperation Institute in Tel Aviv.

No lines in the sand

Fischer said he had heard rumors that Shraga Brosh, the president of the Manufacturers Association, had said the central bank would defend a specific exchange rate.

Brosh, who was sitting in the audience, called out, "That is not true."

Fischer did say the bank had succeeded in influencing exchange rates, but now they are "more or less stable." He said central banks that draw a line in the sand to defend their currency wind up losing, because in doing so they invite an attack on their currency.

Fischer did say the central bank examines the situation daily and uses its own models to moderate forex fluctuation.