Foreign residents have purchased $4.5 billion in shekels since the beginning of the year, Governor of the Bank of Israel Dr. Karnit Flug revealed today in a discussion of the Bank of Israel's intervention at the Knesset Finance Committee. Bank of Israel marketing department head Andrew Abir believes that a large proportion of this amount consists of short-term, i.e. speculative, investments. "Part of the reason is the attractiveness of the Israeli economy, and part is the desire for short-term gains," Flug said. She noted that many other countries besides Israel, including Denmark and Switzerland, had recently taken action to defend their local currencies against excessive appreciation, saying, "It's a game, and this is a signal that makes it difficult for these people to make an easy profit."
Flug displayed data showing that the effective exchange rate of the shekel against the currencies of Israel's trade partners is at its lowest point in at least a decade. The shekel has strengthened 7% against the dollar, 8% against the euro, and over 20% against the pound sterling since the beginning of the year. The shekel has also strengthened against all other foreign currencies, with the exception of the Brazilian real and the South African rand.
Flug added, "Some of the shekel's strengthening is due to the relatively good performance of the Israeli economy, compared with other economies, and we have no intention of taking action against them. There is also, however, excessive appreciation resulting from temporary factors. One of these is the ultra-expansive monetary policy of some of our trade partners, including the negative interest rate, bond purchases, and quantitative easing by the European and Japanese central banks. This policy is making these countries very unattractive for investment. Investors will not choose to invest in bonds with negative yields," Flug pointed out.
Flug explained that the main justification for the Bank of Israel's actions against the strengthening of the shekel in the short term is protecting exports. "When you close a plant because of excessive shekel appreciation, you don't open it against when the exchange rate returns to its natural position. In addition, inflation is significantly below the target, and the steep shekel appreciation is further depressing inflation. One of the reasons why we are buying foreign currency is therefore to help inflation return to the target range. We could use a negative interest rate, as our trade partners did, but that causes all sorts of damage. In view of the risks incurred through a negative interest rate, we need another policy tool – intervention in the foreign exchange markets."
Published by Globes [online], Israel Business News - www.globes-online.com - on March 21, 2017
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