Many economists are finding the Bank of Israel's intervention in the foreign currency market disturbing. The most prominent voice in the government is National Economic Council head Professor Avi Simhon, who demanded renewed discussion of foreign currency policy. Former Ministry of Finance director general Yoram Ariav said that the Bank of Israel was addicted to buying foreign currency, and economists such as Professor Omer Moav and Professor Ady Pauzner accuse the Bank of Israel of causing an inefficient allocation of resources by leading people to invest in the founding of enterprises with no economic justification, instead of in other economic sectors, such as trade and services.
Despite all the criticism, however, Bank of Israel Market Operations Department head Andrew Abir is remaining unwavering in his policy on the shekel. "We are taking action against the strengthening of the shekel, which is due to the good parameters of the Israeli economy. The current account surplus, relatively high growth - we think that our job is to offset their effect on the exchange rate. I am convinced that the main cause of the excessive shekel appreciation is the exceptional monetary policy in the US, Europe, and Japan."
"Globes": You say that your activity in the foreign currency market is purely monetary in order to reduce the distortions created by the central banks in Europe and Japan.
Abir: "Certainly. The reason for what we are doing is not that we think the foreign currency balances are too low. We are using the intervention tool as part of monetary policy, and we say so openly.
There were periods when you raised the interest rate and bought dollars - isn't that a contradiction?
"There was one such year 2010, and there are indications that it was less effective. When we saw the rapid appreciation of the shekel at the beginning of the year - it is also necessary to take into account that the economy was improving, and we didn't intervene because of that. The economy was growing at a good pace, although the composition of growth was unhealthy, because at least in 2016, it was based mostly on private consumption. It seemed to us, however, that there were other factors, Monetary policy was still expansive, and I think that in recent months, we're seeing some kind of stabilization in the exchange rates."
Nevertheless, the shekel is quite strong. How much so?
"The shekel is definitely appreciating against the other currencies. It is hard to say by how much, but it's not a marginal number in comparison with the models of investment houses around the world, and also in comparison with our models. I think that everyone feels this. There's a good reason why people are complaining that it's much cheaper overseas. There are structural reasons for this, but there's no doubt that it's also the exchange rate."
What are you doing in this context? How much do want the shekel-dollar rate to go up?
"The Bank of Israel has already purchased $5 billion since the beginning of the year, nearly as much as it purchased in all of 2016. We have no target for the exchange rate. The assessment changes with time according to the changes in the basic figures for the economy. With a 4% growth rate instead of 2.5%, there should be a shekel appreciation - it's unavoidable."
Warning sign in the markets
Is the fact that you are not announcing a red line increasing uncertainty in the markets and volatility in the shekel?
"As soon as you announce a red line, you are inviting an attack against you. You immediately become a target for players. We have seen this in Switzerland, for example. The volatility in the foreign currency market in Israel is less than in comparable markets, for example in the developed markets. Volatility in all the market is low, incidentally, as a result of large-scale global liquidity, and that is definitely a warning sign, because it usually happens before an upward or downward breakthrough."
You told the Knesset two months ago that you had noticed speculative activity amounting to NIS 4 billion since the beginning of the year. Who is behind this?
"I don't know what speculative means. We saw very varied activity by both hedge funds and 'ordinary' funds. I didn't see that the money that came in was invested in known financial markets, shares, bonds, or in the non-financial investments. The residual assumption is therefore that it was invested in shekels and dollars. Since March-April, we are seeing stabilization in these movements."
Was the volume unusual?
"There were such episodes in the past, and when that happens, we are fairly confident that it's money entering for the short term in order to make a quick profit."
What insights and lessons did you learn from this event?
"The Monetary Committee said that the monetary policy would continue as long as inflation is not consolidated within the target range. We're still far from the target, and I'd say that this is particularly true at a time when monetary policy worldwide is still exceptional."
That is an answer on the strategic level. I'm asking about the tactical level - how Andrew Abir deals with speculative movements. You can ask the banks for specific information about their customers.
"They can't tell what the aim of an individual deal is. We're talking about traders in the market, and we know when (the speculators) are operating in the market. Maybe they haven't fully considered the economic growth figures published by the Central Bureau of Statistics. They see that the growth rate in Israel is one of the highest in the world, and that's something we don't want to change. In a world of low interest rates, the shekel is very attractive."
You fined speculators in 2011. You demanded a liquidity requirement from investors in shekel-dollar derivatives.
"This tool works when there's a gap between the interest rate in the economy and the negligible interest rate on the securities that it leaves in my hands. Today, when the difference in interest rates is negligible, it is ineffective."
Do you have other tools?
"I have no magic wand. Sometimes we should do a better job of explaining our monetary policy, for example when the market thinks (wrongly) that we're going to raise the interest rate."
Published by Globes [online], Israel Business News - www.globes-online.com - on June 12, 2017
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