Bank of Israel Told to Ditch Every Rule After Amassing War Chest
Bank of Israel Told to Ditch Every Rule After Amassing War Chest
(Bloomberg) -- For critics of the Bank of Israel, even measures it’s never attempted before are no longer enough.
Staring down the threat to markets and the economy from the coronavirus outbreak, the central bank this week began to tap its foreign-currency reserves for swaps transactions with local lenders, offering up to $15 billion in its first time ever using that tool to boost dollar liquidity in the swap market. It also re-started government bond purchases, a tool it hasn’t used since 2009.
But policy makers have plenty of firepower left after years of currency interventions netted a stockpile of foreign-exchange reserves that ranks among the world’s biggest relative to the size of the economy. After efforts by the central bank to weaken the shekel before the crisis, the worry now is that further depreciation could create panic that will hurt already vulnerable consumers and banks.
“They should throw out every rule,” said Avi Tiomkin, a prominent Israeli investor who advises global macro hedge funds. “Right now they would commit a huge mistake if they let the currency devalue.”
The urgency is growing as the worst health crisis in more than a century raises the risk of a recession in Israel. The government is preparing for a sharp rise in unemployment after ordering a partial economic shutdown and companies like flagship carrier El Al Airlines Ltd. laid off hundreds of workers.
Israel’s central bank is focused on market tools rather than cutting already-low interest rates to alleviate the crisis. Officials may also consider corporate bond purchases. Others including Prime Minister Benjamin Netanyahu’s top economic adviser Avi Simhon say it should also sell some reserves to boost the shekel.
A program of interventions begun by then-Governor Stanley Fischer more than a decade ago helped the central bank amass reserves that now surpass a third of gross domestic product. Additional options include helping finance the budget deficit and even imposing capital controls on foreign currency, according to Tiomkin.
Despite a show of force on Wednesday to relieve pressure for dollars among local lenders, the shekel is the worst performer this month against the U.S. currency in the Middle East and North Africa.
“The Bank of Israel needs to be the responsible adult and start intervening in the corporate and stock markets,” Ilan Flato, head of the country’s Association of Publicly Traded Companies, said in a statement.
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