May 13 (Bloomberg) -- Bank of Israel publishes the following statement on its website.
“Questions and answers on the Monetary Committee’s decision to reduce the interest rate in an inter-meeting decision, and to introduce a plan to purchase foreign exchange to offset the effect of natural gas production from the Tamar gas field.
1. Has the foreign exchange policy which you announced in August 2009 been abolished?
2. How will you purchase the foreign exchange—at one time? through fixed daily purchases?
The purchases will be made in accordance with market conditions, throughout the year. The Bank of Israel will report these purchases (separately) together with its Foreign Exchange Reserves notice on the 7th of each month.
3. In the past you have declared that the optimal level of reserves is $65–90 billion. Has this been changed? Do you plan to increase the reserves to above this range?
The current level of the reserves, about $77 billion, is still far from the upper bound of the range. Furthermore, the Law allows the Bank of Israel to deviate from this range if needed for monetary policy purposes.
4. According to your policy, you only purchase foreign exchange when the exchange rate deviates from fundamental economic conditions or when there are disorderly markets. The production of natural gas is a real economic factor which is fundamental and long term. Why offset its effect through foreign exchange purchases?
Natural resources are a blessing for Israel’s economy. However, international experience shows that sometimes the discovery of natural resources can also have negative effects on the economy, often referred to as ‘‘Dutch disease”. The goal of the policy announced is to offset these detrimental effects.
5. Have you taken into account the cost to the Bank of Israel resulting from foreign exchange holdings?
The foreign exchange reserves are invested in liquid assets so that they can be utilized in times of crisis. The foreign exchange flows which will accumulate as a result of this policy will be invested in longer term assets, with higher expected returns.
6. How did you get to the precise figure of $2.1 billion?
The current account is expected to improve by about $2.8 billion as a result of natural gas production at Tamar in 2013. However, foreign exchange-denominated payments are expected to be made by the related companies in order to repay debts and repatriate profits, and for new investments. Thus, the Bank of Israel decided to offset about 75 percent of the estimated effect on the current account.
7. Did you make a mistake in cancelling the monetary interest rate decision for May?
The decision not to hold a monetary interest rate meeting twice a year, after the holiday season was based on the fact that during these periods domestic economic data publication is delayed. Despite this the Monetary Committee continues to meet each week, and can act at any time should there be a need. In recent weeks the shekel appreciated significantly, and interest rate cuts by other central banks have accelerated this trend, requiring a policy response.
8. In your assessment, what will be the effect of reducing the interest rate on home prices? Do home buyers need to pay the price of assistance to exports?
The decision of the Monetary Committee is intended to deal with the overall economy, and balances considerations impacting various sectors. It should be noted that the measures adopted by the Banking Supervision Department concerning mortgages reduce the impact of the BoI’s interest rate on the housing market.
9. The last time the Bank of Israel made an inter-meeting rate decision was after the collapse of Lehman Brothers, at the height of the global crisis. In 2 weeks you were scheduled to decide on the interest rate in any case. What do you know that did not allow you to wait?
Recently, crucial information became available which was at the basis of the decision. Central banks reduced interest rates and continue large scale quantitative easing. These intensified the appreciation pressures on the shekel.’’
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