Bank of Israel’s Melnick Says Shekel Floor Not on AgendaAlisa Odenheimer
Bank of Israel policy maker Rafi Melnick said the central bank isn’t considering setting a minimum exchange rate for the shekel, even as manufacturers are pressing it to do exactly that.
While the Czech Republic weakened the koruna by setting a benchmark level in November and buying foreign currency, the situation in Israel, where the shekel is trading near its strongest in three years, isn’t the same, Melnick said.
“They wanted to increase inflation,” Melnick said in an interview in his central bank office in Jerusalem. “They had other problems. If things fundamentally change we can do all kinds of things, but it’s not something that is being considered today.”
The Manufacturers Association of Israel, whose members account for 95 percent of the country’s industrial production, has been urging the central bank to buy as much foreign currency as needed to bring the exchange rate to 3.8 shekels to the dollar, a depreciation of about 10 percent from 3.4554 at 4:35 p.m. today. The strong shekel is “destroying the economy,” the group said in an e-mailed statement yesterday.
The shekel has gained about 15 percent against the dollar since July 2012, hurting exporters, even as the central bank pared interest rates and bought about $9 billion in the past year to slow the gains. In the meantime, growth has slowed from 4.6 percent in 2011 to 3.4 percent last year. Export growth slowed to an annual 1 percent in each of the past two years, from 7.3 percent in 2011, according to the Organization for Economic Cooperation and Development.
“The BOI’s approach is the right one,” Tevfik Aksoy, chief economist for Europe, the Middle East and Africa at Morgan Stanley in London, said by e-mail. “Perhaps the currency purchases might be increased to fine tune the currency market every now and then, but this is a robust economy with ‘real’ reasons behind the currency appreciation.”
While the strong shekel is of concern to policy makers, due to its effect on exporters and therefore on employment, there are also benefits to the appreciation, Melnick said.
“The Israeli population at large is enjoying the strong shekel,” he said. “Imports are cheaper. You can go to vacation abroad. We can buy raw materials at a lower shekel price. So there are also positive elements in the strengthening of the shekel.”
Melnick, who is provost of the Interdisciplinary Center Herzliya, is one of three external members of the central bank monetary policy committee, which was appointed in 2011. The committee, led by Governor Karnit Flug, also includes the deputy governor and research director.
Born in Chile, Melnick holds a doctorate in economics from the University of California, Berkeley. He served as deputy director of the Bank of Israel’s research department in the 1990s before joining the IDC.
The Bank of Israel kept the rate at 0.75 percent at the end of last month, the lowest in more than three years, after reducing it 10 times since 2011. One policy maker broke ranks, voting for the first time in the committee’s history to raise borrowing costs.
Melnick said that “the size of monetary help to the Israeli economy is about right.”
While an additional rate cut could “theoretically” weaken the shekel, there isn’t much speculative activity in the currency, and the fundamental factors that are strengthening the shekel would continue to operate, Melnick said.
“I don’t think that monetary policy can fundamentally change the equilibrium fundamental exchange rate,” Melnick said.
Israel’s rate of expansion in recent years of around 3 percent is lower than what Melnick estimates is its long-term growth potential of about 4 percent. Still, it’s a “good rate of growth,” he said.
With stable inflation, declining unemployment, rising labor force participation, a current account surplus, a low fiscal deficit and declining public debt, Israel’s macroeconomic performance is strong, Melnick said.
“Take all these parameters and compare them with what other countries are doing,” he said. “Israel is doing quite well these days.”