Governor of the Bank of Israel Dr. Karnit Flug will not bend to pressure to set “an exchange rate level” for the shekel-dollar, despite reaching its lowest level since August 2011, Globes reported on Tuesday.
Flug was defending her limited intervention policy at the Israel Economic Association’s Annual Conference, where she noted that most countries do not set an exchange rate target for their currencies.
“Contrary to the concept that prevailed in the past that the stable foreign exchange policy regimes were the ones at the extremes — a fixed exchange rate or a completely floating exchange rate — the recognition grew after the crisis that a regime of a mobile exchange rate with occasional intervention, referred to as “managed float,” may have the potential to support policy objectives, provided that there is no declared exchange rate level that could constitute a “soft target for speculators,” Flug said.
The managed float became the most common exchange rate regime in the emerging markets, while the ‘free float’ regime prevails in less than 8% of these economies,” she said.
As an alternative, Flug favors restricting capital flows.
“There has been a change in tune about restricting capital flows. Once, the discussion was about capital market oversight; now it is about managing capital flows. Once, capital flows were eased and there was liberalization; now capital flows are being restricted, and the number of restrictions since the crisis has only grown.”
However, the Ministry of Finance, which would be responsible for framing such a policy — such as by levying a tax on capital flows — has thus far refrained from doing so.
Regarding Israel’s foreign currency reserves, which now approach $90 billion due to the Bank of Israel’s dollar purchasing policy, Flug said, “A number of countries that had large foreign exchange reserves sold significant volumes of foreign exchange when capital flows changed direction, and thereby prevented a serious shock to the exchange rate that could have caused a financial shock.”