Bank of Israel Isn’t Indifferent to Exchange Rate, Governor Says

The Bank of Israel isn’t indifferent to developments in the exchange rate and is buying foreign currency to moderate the shekel’s appreciation, Bank of Israel Governor Karnit Flug said today.

The “weak point” of the Israeli economy is exports, which have been “stagnating” for the past two years, Flug said in her first appearance before parliament’s Finance Committee since becoming governor in November. Exports have been hurt first and foremost by weak global demand, as well as the shekel’s gains, she said.

“We are not apathetic,” said Flug. “The actions we are taking and have taken show this.”

The Bank of Israel cut the benchmark interest rate three times last year, bringing it to its lowest since 2009, and purchased about $5.3 billion in foreign-currency in an effort to weaken the shekel. The currency climbed 7.5 percent last year despite the bank’s moves, the most of 31 major currencies Bloomberg tracks, hurting exports that account for about a third of Israel’s $273 billion economy.

In addition to hurting exports, the exchange rate has also made imports cheaper, making things tougher for local manufacturers who produce competing goods, Flug said.

The Bank of Israel has come under pressure from manufacturers to set a target of 3.8 shekels to the dollar. Former Deputy Governor Zvi Eckstein has urged the bank to cap the shekel around 3.3 to 3.4 to the dollar.

Exports may be helped this year by a projected uptick in global demand. Global trade, the most important indicator of demand for Israeli exports, is expected to expand by almost 5 percent in 2014, compared to 3 percent last year, Flug said.

Israel’s gross domestic product increased 3.3 percent in 2013, as exports and investment stagnated, the Central Bureau of Statistics said last week. Exports of goods and services declined 0.1 percent in 2013.

Israel’s output is expected to grow at the same rate this year, the Bank of Israel forecast in December.

Before it's here, it's on the Bloomberg Terminal.