Top Economist Raps Exchange Rate Floor


A senior economist came down on the side of Governor of the Bank of Israel Dr. Karnit Flug in her resistance to pressure to set a floor for the exchange rate as a means of stabilizing the market, Globes reported on Thursday.

“Our experience has taught us that to be effective, intervention should be carried out without providing insurance to market traders about the quantity, timing, and level of the exchange rate at which the central bank will buy or sell foreign currency,” said Bank Hapoalim chief economist Leo Leiderman at the CFO Forum conference in Eilat.

Leiderman’s remarks make him one of the first top economists to support Flug in the debate over the exchange rate policy.

“If the Bank of Israel were to set a lower limit for the exchange rate, it would cease to be credible within a few weeks, as happened in previous episodes. It was therefore good that the Bank of Israel acted as it did,” said Leiderman.

“My conversations with Israeli and foreign investors, and reviews and articles by prominent investment houses, made it clear that the Bank of Israel’s last intervention was very effective because it was unexpected, powerful, and constituted a declaration of intent about the Bank of Israel’s concern from the recent volatility in the exchange rate.”

Leiderman believes that long-term market forces are behind the shekel’s renewed appreciation, not speculators. “There is no doubt that the shekel’s recent appreciation reflects the ongoing inflow of non-financial investment by foreign residents and good present and expected current accounts and balance of payments figures. It is also obvious that positive developments in the energy sector, specifically natural gas, have a role in the strengthening of the shekel. The strengthening of the shekel is not caused by short-term speculation by foreign investors.”

However, for good news Leiderman intimated the shekel’s renewed appreciation would be temporary, saying, “The exchange rate will mainly be affected by global trade and exchange rates. In the past few days, we’ve seen a growing number of analysts predicting a measured and gradual correction in the form of a shekel depreciation. An example is Bank of America strategists who advise selling the shekel in favor a 50-50 dollar-euro mix.”