BoI research backs forex intervention

Karnit Flug

The study examined the effect of Bank of Israel intervention in foreign currency trading in 2009-2015.

Following criticism of the Bank of Israel's intervention in the foreign currency market aimed at weakening the shekel, the Bank of Israel today published the results of a study it conducted in order to test the effectiveness of its purchases of foreign currency. The Bank of Israel Research Department concludes in its study that its intervention had contributed to depreciation of the shekel.

The study, conducted by Dr. Sigal Ribon of the Research Department, examined the effect of the Bank of Israel's intervention in the foreign exchange market on the exchange rate in 2009-2015.

The Bank of Israel, which resumed its intervention in the foreign currency market in March 2008, after having refrained from any intervention in the market for a decade, adopted the goal of weakening the shekel, which began strengthening against the world's leading currencies in 2008 following the economic crisis that year and the globally prevailing near-zero interest rates. Intervention initially consisted of purchases of foreign currency of predetermined size amounting to $25 million a day, and later over $100 million a day. In August 2009, the Bank of Israel changed its policy, switching to intervention at its discretion in non-predetermined amounts.

The study results show that during the part of the study period in which intervention was at the Bank of Israel's discretion, from September 2009 until the end of 2015, each $100 million of foreign currency purchased by the Bank of Israel caused the shekel to depreciate by 0.07-0.09%. For the $830 million monthly average of foreign currency purchased during this period, a depreciation effect of 0.6% was found for that month. The Bank of Israel notes that using a different technique that did not take the amount of foreign currency purchases into account, it was found that if the Bank of Israel intervened in the foreign currency market to any extent whatsoever in a given month, the shekel depreciated by 1.1%-1.4% in that month.

The Bank of Israel has purchased over $1 billion in order to weaken the shekel in recent weeks, after the shekel-dollar rate fell to a 30-month low. Following the Bank of Israel's intervention, the shekel fell slightly against the dollar, but the exchange rate again fell to NIS 3.63/$ in recent days, despite the interest rate hike in the US. It is believed that the main reason for the steep fall in the shekel-dollar rate, which detracts from Israel's exports, is the strong Israeli economy and export surpluses, which contribute to the supply of dollars, resulting in appreciation of the shekel. According to various assessments, speculators regard the shekel as one of the world's strongest currencies and a "safe harbor." The Bank of Israel's foreign currency reserves recently exceeded $100 billion, and are now at $102 billion.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 19, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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