Pressure is growing on the Bank of Israel to take strong measures to devalue the shekel. Manufacturers Association of Israel president Zvika Oren today called on Governor of the Bank of Israel Karnit Flug to cut the interest rate from 0.75% to 0% now, and to embark on aggressive program of purchasing dollars.
"The interest rate should be cut to 0% already in the next interest rate decision, and the rate of foreign currency purchases should be increased dramatically," Oren said. "In addition, the factors causing the unique phenomenon in the Israeli economy should be urgently addressed, and the reason why the shekel continues to strengthen even in the current security situation should be investigated."
Despite Operation Protective Edge, the shekel is still flexing its muscles, with shekel-dollar trading at a three-year low exchange rate. If this trend persists, the exchange rate is liable to fall below the NIS 3.40/$ barrier. Market traders expressed amazement that the shekel is still strengthening, despite the security situation. The Bank of Israel will take its interest rate decision for August tomorrow, with no change anticipated by the market.
Despite the strength recently demonstrated by the shekel against both the dollar and the euro, the Bank of Israel is keeping a low profile, with almost no intervention in the market. "There is no reason why the Bank of Israel shouldn't return to the rate of purchases followed by preceding Governor of the Bank of Israel Prof. Stanley Fischer in 2008-2009, which reached almost $2 billion a month," he complained.
Oren attacked the Bank of Israel for not achieving its targets: "The bank is not achieving its main target of price stability, which is binding; the effective inflation rate over the past 12 months was only 0.5%, i.e. below the lower bound of the 1-3% price stability target. The low inflationary environment makes an interest rate cut obligatory, particularly in view of the fact that inflationary expectations for the coming year are below 1%, according to capital market estimates in recent days."
"The Bank of Israel is also remiss in attaining its secondary target of encouraging growth and employment. Industrial exports were down 9% in the second quarter of the year, and over 1,500 employees have been laid off since the beginning of the year," Oren added.
Published by Globes [online], Israel business news - www.globes-online.com - on July 27, 2014
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