Top officials at the Bank of Israel are aware of the huge damage being done to the Israeli economy in general and to exporters in particular by the continuing appreciation of the shekel against the dollar, euro and other currencies (especially in labor intensive industries that particularly concern Bank of Israel's senior officials), say Yonatan Katz and the research team at Leader Capital Markets Ltd. (TASE:LDRC) in their weekly macro review.
Leader discusses different options, such as following the lead of the Czech or Swiss national banks. "In those countries the central bank declared an exchange rate that it would support at any price and would prevent appreciation beneath that level. The Czech Republic adopted this policy (with the support of the OECD) on November 7 (and set the rate at 27 koruna/€) and succeeded in keeping that rate (the rate is currently 27.47/€). In November, the Czech central bank bought 200 billion koruna, or about 5% of its GDP."
However, there are differences between the Czech Republic and Israel. "The Czech Republic is in a recession and suffers from deflation. Therefore, the Czech central bank is not trying to dry up the monetary flow from foreign currency purchases. This is not the policy in Israel. Despite the differences this plan is applicable here too," Leader says.
Leader also observes that such a courageous policy requires broad support from the minister of finance and prime minister, and will only succeed if it projects credibility, that is to say, if the markets are convinced of the central bank's ability to prevent the exchange rate crossing the red line.
"Adopting such an approach in in Israel is certainly possible. Of course we're talking about a change in approach and moving away from a free foreign exchange policy, but the massive foreign exchange purchases by the Bank of Israel since the economic crisis are an abrupt intervention in the foreign currency market."
Leader believes that it is not possible to rule out such a policy in the near future or at least the first half of 2014. It would probably require raising the interest rate, and the Bank of Israel would be concerned about the effect of the appreciation that this measure would cause. By the way, the Czechs have not committed to any defined period for this adopted policy and are permitted to withdraw from it at any time. On November 7, a 4.7% devaluation of the koruna was implemented (by purchasing foreign currency) before the new policy was introduced. "A similar step in Israel cannot be ruled out."
Published by Globes [online], Israel business news - www.globes-online.com - on December 29, 2013
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