After sending forex market animals reeling in shock this week with a barrage of heavy-handed intervention, Bank of Israel Governor Stanley Fischer sought to reintroduce proportion yesterday, in an address to the Knesset Finance Committee. "Obviously we won't be buying foreign currency forever," the governor said. "Sometimes what the market does isn't justified, so it's important for the central bank to have the option of intervening."
Indeed, the Bank of Israel continued to do just that yesterday, buying tens of millions of dollars and sending the greenback's exchange rate against the shekel up 0.6%. The representative rate was finally set at NIS 3.889.
When the Bank of Israel began intervening in the market a year ago, it stated that its goal was for Israel's foreign currency reserves to reach $40 billion to $44 billion. Yesterday the reserves reached $52.1 billion, an increase of $20 billion from the year's start.
Correcting another prevalent misapprehension, Fischer said yesterday that the figures to date do not prove that the recession is over. "But it's clear that we're near that point," he said. Barring surprises, the governor added.
The Bank of Israel knows it can't prevail over market forces, Fischer said. Clearly, its purchases of dollars have to stop, but when market failures arise the central bank must have the freedom to step in, he said.
But he ruled out the option of setting exchange rate targets. The policy of maneuvering to keep the shekel-dollar exchange rate within a narrow band has failed in many a country, the governor said. Over here, in Israel, back in 1997 attempts to do just that led to inflation. Exporters will just have to learn to deal with the exchange rates dictated by the markets, Fischer warned. The Bank of Israel can't help them forever.
Yet it will keep intervening for the nonce, until the crisis is clearly over.
"I did not find justification in July for an exchange rate of NIS 3.20 per dollar, and sometimes the central bank intervenes so the dollar's [exchange rate] will be based on real market forces, not speculation," the governor said.
Market animals, meanwhile, feel they aren't alone. "The Bank of Israel is clarifying that it isn't about to leave. It wants to lead the dollar [exchange rate] to a certain level," said a forex dealer at one of the big banks yesterday. Market observers think the central bank wants the dollar to stabilize at about NIS 4, and also want to teach speculators that it doesn't like them. "There's already less pressure from sellers [of dollars], the traders said.
Switching to the subject of the low level of Bank of Israel interest rates - the overnight rate for banks has been just 0.5% for five months - Fischer noted that one of the central bank's purposes is to stimulate demand. Indeed, the low rate of interest has freed up much money that went into equities, driving the boom on the stock market, he said.
"Our goal is to restore inflation within a year to the target of 2%, which is the midpoint of the government's target range of 1% to 3%," the governor told the Finance Committee.
It's true that holding large foreign currency reserves carries a cost, but it also confers advantages, Fischer said. A country that has large reserves is economically more secure in the face of adversity. "For instance, South Korea and Brazil handled the crisis more easily precisely because of their large foreign currency reserves."
Critics have complained that holding such a huge amount in dollars, as opposed to a broader mix of currencies, exposes Israel to deterioration in the American currency's status. But Fischer yesterday told the Knesset members that with reserves of $50 billion, he sleeps better at night.
He also ruled out another idea making the rounds, of slapping a tax on speculative capital movements. "Even Chile dropped that idea," he said.
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