BOI Takes Credit for Holding Down Shekel


Despite repeated calls for more aggressive action in the face of a persistently strong shekel, the Bank of Israel is correct in maintaining its policy of selected dollar purchases to stabilize the exchange rate, a senior BOI official told Globes.


“There is no question that foreign currency purchases affect the exchange rate, just as we see elsewhere. With smaller purchases than in previous years we’ve succeeded in stemming a very rapid appreciation of the shekel,” the bank official said, in response to harsh criticism directed Governor Dr. Karnit Flug.

“It should be remembered that we acted against the weakening of the dollar in international markets, which caused people to think that the interventions were ineffective. Market players thought that natural gas production would have a strong effect on the exchange, and the Bank of Israel’s program offset that.”

Bank analysts are confident that the shekel surge will sooner or later subside, as they attribute its strength to transient factors, such as the appreciation of currencies against the dollar. Like every rally, it will reverse, either when U.S. growth resumes, or in the event of a crisis in Israel.

The Bank of Israel nevertheless admits that a 7% appreciation of the shekel, such as occurred in 2013, cannot be explained by market forces (fundamentals) alone, in the absence of evidence for it. The BOI believes real changes can explain an appreciation of 1-2%, but not 7%, as happened last year.

Regarding proposals for setting an exchange rate floor for the dollar, The Bank of Israel says that if an exchange floor of NIS 3.30/$ is declared, the next day’s representative rate would be at that level. In addition, full political support would have to be organized to switch the exchange rate from a floating regime to a fixed regime.

BOI dismisses the allegation that foreign speculators in the market are making quick profits on the shekel at the expense of the Israeli economy. The big players aren’t foreigners, but Israeli investment institutions, it says. They began investing abroad 3-4 years ago, and in the past two years they’ve been hedging their investments, which involves the sale of dollars, thereby contributing to the appreciation of the shekel.