Morgan Stanley Sees Bank of Israel Buying More Dollars on Growth

The Bank of Israel may intervene in the foreign currency market more aggressively as the shekel’s gain is posing a risk to growth in the export-driven economy, according to Morgan Stanley.

The shekel has outperformed other major currencies this year, spurred by the start of gas production and expectations of a faster-growing economy. The Bank of Israel yesterday bought around $300 million, according to Rony Gitlin, head of spot trading at Bank Leumi Le-Israel, after the shekel rose the most in seven weeks. Bank of Israel spokesman Yoav Soffer declined to comment.

“The currency has appreciated significantly and poses a risk to growth,” Tevfik Aksoy, chief emerging-markets economist at Morgan Stanley in London, said in a note to clients today. “High foreign exchange reserves and a current account surplus with a fairly stable macro picture suggest that the currency will remain strong.”

A more-aggressive intervention policy could be back on the table once a new governor is in place, Aksoy added. The Bank of Israel has been headed by interim Governor Karnit Flug since Stanley Fischer stepped down at the end of June.

The shekel weakened for the first time in five days, falling 0.6 percent to 3.6394 a dollar at 5:18 p.m. in Tel Aviv, trimming this year’s advance to 2.6 percent.

Dollar Purchases

Under Fischer’s leadership, the Bank of Israel announced a program in May to purchase $2.1 billion in foreign currency this year to offset the effects of the start of natural gas production on the currency. The central bank has bought $1.02 billion as part of that program as of the end of August, according to Bank of Israel data. Israel’s foreign currency reserves were at $78.5 billion at the end of last month, according to the data.

Morgan Stanley raised this year’s forecast for the Israeli economy to 3.8 percent from 3 percent after growth expanded an annualized 5.1 percent in the second quarter compared with a revised 2.7 percent in the previous quarter. Faster growth in 2014 might be a “significant challenge” amid the government’s fiscal austerity program, according to Morgan Stanley, which lowered its growth forecast for next year to 3 percent from 3.4 percent.

“The currency continues to appreciate and one of the ways, other than the intervention policy, might be to lower real interest rates further,” according to Aksoy. “We cannot rule out another 25 basis points” reduction.

The Bank of Israel kept the benchmark lending rate unchanged at 1.25 percent on Aug. 26 for a third month amid signs a global recovery is strengthening. All 15 analysts surveyed by Bloomberg forecast the rate will be held by policy makers at their next meeting on Sept. 23.

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