Bank of Israel’s Flug Slammed on Shekel Policy by Finance Panel

The Bank of Israel came under twin assaults today, with parliament’s Finance Committee accusing it of navigating a “failed” foreign currency course and manufacturers saying Governor Karnit Flug “is leading the economy to doom.”

Finance committee members demanded that the bank set and defend an unspecified shekel floor, charging that the bank’s foreign currency purchases have been insufficient to rein in the shekel and help Israel’s export-driven economy, according to an e-mailed statement from the committee. The shekel gained 7.5 percent in 2013, the best performer among 31 currencies Bloomberg tracked, and has weakened 0.4 percent since the beginning of the year, to 3.4605 to the dollar at 3:51 p.m.

“The current policy of the Bank of Israel has failed,” Labor parliament member Erel Margalit said today at a Finance Committee meeting, according to the statement. “Market speculators are running circles around the Bank of Israel, making a lot of money, and we are not succeeding to defend the shekel.”

Israel’s benchmark interest rate, at 0.75 percent, is higher than rates in the U.S. and Europe.

Andrew Abir, head of the Bank of Israel’s markets division, told the panel the bank hasn’t observed speculative activity recently and that foreign currency purchases do appear to have affected the shekel rate, which has “barely changed” against the dollar this year. A transcript of his testimony was posted on the bank’s website.

Floor Liabilities

The main factors driving the shekel’s strength are a reflection of the economy’s relative robustness, as evidenced by the current account surplus and strong flows of direct investment, he added.

Abir cautioned against setting a currency floor as was done in Switzerland and the Czech Republic, saying monetary policy would then become too focused on maintaining that exchange rate, to the possible detriment of other goals, such as maintaining price stability.

The Manufacturers Association of Israel, which says it is responsible for more than 95 percent of the country’s industrial production, renewed its call to set a floor of 3.8 shekels to the dollar.

“The Bank of Israel chooses to do nothing, like dogs barking while the caravan moves on,” it said in a statement. “Instead of the bank buying as many dollars as necessary to raise the exchange rate to 3.8, the governor continues to ignore the situation and is leading the economy to doom.”

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