Bank of Israel: Fischer Without Fischer?


The post-Stanley Fischer era at the Bank of Israel with newly-appointed governor Karnit Flug at the helm is likely to be an era of Fischer policy without Fischer in person.

That, at least, is the Merrill Lynch assessment in a review released on Monday which said, “We expect Karnit Flug to maintain Fischer-style monetary policy.”

The report forecast stepped-up intervention in the foreign currency market to prevent a further appreciation of the shekel, and said Israel’s housing market is not showing signs of overheating.

Another interest rate cut to below 1% is not expected, and ML believes that the Bank of Israel will continue its purchases of dollars and an expansionist monetary policy.

“The shekel is now at its 2008 high, confirming why the Bank of Israel is so reluctant to see further appreciation and will likely step up in reserves accumulation. The appreciation trend might be contained next year if the Bank of Israel takes more aggressive steps, in our view.”

Merrill Lynch does not believe that that the Bank of Israel will implement restrictive capital control measures to prevent the shekel’s appreciation, such as were implemented by Brazil, Chile, Peru, Taiwan, South Korea, Turkey, and South Africa. However, it believes that it will intervene in the foreign currency markets, because it estimates that each 1% appreciation of the shekel could lead to a 1.5-2.5% decrease in exports of goods, which account for 40% of Israel’s GDP.

Merrill Lynch dismisses the existence of a housing bubble, citing statistics showing that housing prices in Israel have not risen as much as in other countries, and that Israel’s mortgage market is safer than other mortgage markets.

“The housing market in Israel is not showing signs of overheating, in our view,” says Merrill Lynch. “Although housing prices increased by almost 80% since 2007, a bigger picture view shows that housing prices in Israel have lagged peer countries since 2000. Israel had a late start and still trails some countries.”