Stanley Fischer's Remedy Lives On in Chase After Weaker Shekel

(Bloomberg) -- The Bank of Israel still isn’t ready to completely step out of the foreign-exchange market more than a decade after it began a program of trying to weaken the shekel under then-Governor Stanley Fischer.

Aimed at keeping the shekel in check to give exporters an edge, the interventions on Fischer’s watch remain part of the toolkit of Governor Amir Yaron. He and fellow policy makers last month even signaled a willingness to buy foreign currency for the first time since January.

Complicating matters is that Yaron has set as his “immediate challenge” an exit from years of ultra-low interest rates which have left little room for maneuver in case of a downturn. That goal is lending support to the shekel, which is among the world’s top performers against the dollar this year, and getting in the way of the central bank’s push for change.

The rollback of stimulus depends on inflation climbing near the 2% midpoint of the target range -- an acceleration throttled largely by a stronger currency. The ongoing appreciation is putting “the biggest downside pressure” on consumer prices, according to Morgan Stanley.

Inflation has gained little momentum in the months after a surprise move by the central bank in November to raise rates for the first time since 2011. Not a single economist surveyed by Bloomberg predicts it at the 2% midpoint this year or next, a level Israel last reached in 2013. Data due Wednesday will show annual price growth was little changed at 1.5%, according to the median of 13 forecasts.

Stanley Fischer's Remedy Lives On in Chase After Weaker Shekel

Although the intervention talk resonated enough to send the shekel into a bout of weakening, it then clawed its way back.

“They’ll try to correct very out-sized distortions or market failures and not attempt to change the trend,” said Barry Topf, a former director of market operations who helped design the intervention program when Fischer was governor. “Nothing has changed in terms of the long-term trends of the shekel having a real appreciation over time.”

The shekel had its worst week against the dollar this year after the intervention warning. But talk alone wasn’t enough to sway it for long.

Bouncing back during the past two weeks, the Israeli currency made up for the losses by soaring close to 2% since April 25, one of the biggest surges of any currency globally in that period. It’s appreciated about 4.5% against the dollar in 2019, powered by Israel’s burgeoning energy industry, foreign direct investment and export-driven economy.

Stanley Fischer's Remedy Lives On in Chase After Weaker Shekel

While the central bank has maintained currency operations as a tool it could use in case of “anomalous fluctuations” in the market, Yaron appeared to draw the line on that approach at his December appointment ceremony when he said the exchange rate should be determined “without the need for significant intervention.”

But the currency has returned to the forefront of discussions as the central bank waits to resume rate hikes.

Once primarily the bane of exporters, a strong currency is increasingly in the spotlight for choking off price pressures too. Just last week, the Bank of Israel’s director of market operations and monetary committee member, Andrew Abir, singled out the stronger shekel among the biggest challenges facing future policy.

The central bank’s research department is forecasting the key rate will rise to 0.5% from the current 0.25% toward the end of the third quarter this year. The next decision is scheduled for May 20.

“It seemed like they were trying to create the shekel environment in which you could hike,” said Citigroup Inc. economist Michel Nies. During the next few meetings “we will see one because even though they’re cautious in their rate path and in their communication, there is a point where this is the moment if you want to hike.”

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