Bank of Israel Draws the Line on Currency Gains After Crisis
Israel’s central bank is again turning wary of gains in the shekel after the currency largely recouped losses sustained when the global coronavirus pandemic hit the economy.
“In terms of the appreciation of the shekel over the last couple of weeks or so, I think we talked about a window where the shekel would be reasonably priced,” Bank of Israel Deputy Governor Andrew Abir said in a phone interview. “We’re now beginning to stretch that window.”
The shekel depreciated as much as 0.3% to reach a daily low against the dollar after the comments, and traded 0.1% weaker at 5:49 p.m. in Tel Aviv.
Officials are already active in the market, with the central bank buying foreign currency on Tuesday, according to a person familiar with the matter. Following its biggest interventions in nearly a decade to weaken the shekel, it paused purchases in March while focusing on emergency measures to stabilize markets.
“If necessary, we’ll take action to return us to the window,” Abir said. “We’re going to be less tolerant of that appreciation as we go forward.”
The Bank of Israel began shelling out billions on foreign-exchange purchases late last year to hold back the shekel after its appreciation started to choke off inflation. Besides supporting exports as the economy succumbs to a recession, a weaker currency is among the few tools left to cope with a bout of deflation that the International Monetary Fund says will be the steepest of any country in the world this year.
After implementing a near-total shutdown of the economy and restricting movement, Israel is now starting to ease restrictions. The country has seen a sharp slowdown in serious case, with a total of over 15,000 confirmed infections and more than 200 deaths.
Two key drivers of the shekel’s appreciation over the last year were foreign direct investment and the country’s burgeoning natural gas industry. Both of those sectors will take a hit due to the outbreak, according to Abir.
High-tech companies will face a harder time raising funds, while the collapse in energy prices will make it more difficult to export gas from Israel to new destinations.
“All these things are sort of question marks about how optimistic people should be going forward,” Abir said.
The shekel is trading back around pre-crisis levels after appreciating by over 9% against the dollar since mid-March. Early last month, it weakened dramatically, before the central bank stepped in to offer up to $15 billion in currency swaps.
This week, Israel will gain entry into the FTSE World Government Bond Index, which could mean an influx of billions of dollars into local bond markets. Abir said the central bank has yet to see “much actual buying from foreigners” linked to the imminent inclusion.
“What we saw was a lot of speculative interest” so far, via derivatives and interest rate swaps, he said. “We’re not likely to see very large numbers as we go forward. I think it’s not the perfect timing because people are going to be a lot more cautious to invest in new areas.”
Israel now faces a challenge of price growth below zero this year, with inflation settling under the low end of the central bank’s target range since last May. In March, prices didn’t rise in Israel from a year earlier for the first time since inflation was last below zero almost three years ago.
“Beyond our obvious interest in getting the economic activity back on track in the near term, it’s also very important for us to get inflation back into the 1% to 3% band over the medium term,” Abir said. “That’s becoming more important with the increase in the burden of debt of the country.”
The Bank of Israel expects a V-shaped recovery in 2021, with the latest staff forecast calling for the economy to contract 5.3% this year before rebounding 8.7% in 2021. Threats to the outlook abound, however, as the country begins easing restrictions.
“There are a lot of risks going forward -- it remains to be seen what happens when we start relaxing things in terms of a recurrence in the rapid rise of infections, but certainly the feeling is more relaxed and optimistic,” Abir said. “We’re still in a relatively good position.”
After rolling out a number of crisis-era tools to support markets and the economy, including 50 billion shekels ($14.3 billion) of government bond purchases, the central bank is now waiting to see how the situation develops.
“We’ve got plenty of tools that we can either expand their use of or introduce new ones. It very much depends on how things progress over the next month,” Abir said.
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