Shekel Battering Exports Puts Pressure on Flug: Israel Markets

The Bank of Israel is facing rising discontent for not reining in the export-battering shekel.

With parliament’s Finance Committee accusing the bank of navigating a “failed” currency policy and manufacturers urging it “to wake up out of its coma,” the BOI is under pressure to consider another rate cut, step up dollar buying and set a shekel floor. The currency has advanced to a near three-year high since policy makers kept borrowing costs unchanged at 0.75 percent on June 23, prompting the bank to buy about $400 million four days later, according to a report by Mizrahi Tefahot Bank Ltd. The central bank declined to comment.

Because the purchase had a limited effect on the currency, weakening it by 0.1 percent, “the bank is either going to have to buy dollars more aggressively, or in the end will be forced to cut the rate,” said Yshai Shilo, a bond trader at Israel Brokerage & Investments Ltd. in Tel Aviv. “I think they will keep buying, see that it doesn’t have a huge impact, and in the end will cut.”

The shekel has strengthened about 6 percent in the past year. The Israel Export Institute, set up by the government and private businesses to promote exports, blamed the strengthened currency for a “standstill in exports,” which account for about a third of Israel’s $273 billion economy. It called on the central bank to cut its main interest rate 0.25 percent.

The bank took action again today, purchasing more than $100 million, according to Rony Gitlin, head of spot trading at Bank of Leumi Le-Israel Ltd. The currency weakened 0.2 percent to 3.4347 to the dollar at 2:34 p.m. in Tel Aviv.

Currency Challenge

Bank of Israel Governor Karnit Flug inherited the currency challenge when she took the helm of the bank after Stanley Fischer stepped down mid-term last June. Since then, the Monetary Policy Committee has cut the benchmark interest rate twice by a total of 50 basis points. The panel is due to meet again on July 28.

Fischer had resumed foreign currency purchases for the first time in almost two years in April 2013 to stem the shekel’s rally. The bank’s dollar reserves rose to $86.5 billion at the end of last month, from $78.2 billion at the end of June 2013, when Flug took over.

For parliament’s Finance Committee, this hasn’t been enough. The panel urged policy makers on June 9 to set an unspecified minimum exchange rate, or floor, against the dollar, a notion Flug has resisted.

‘Soft Target’

Declaring a set shekel-exchange level could constitute a “soft target” for currency speculators, she said last month.

“The Bank of Israel intervenes in the market when the exchange rate is not consistent with the basic economic conditions,” Andrew Abir, head of the central bank’s Market Operations Department, told the parliament committee. He noted the shekel has remained almost unchanged against the dollar this year.

Setting a target for the shekel also means “monetary policy will be subject to maintaining the exchange rate without being able to act to achieve its other objectives, such as preventing inflation,” Abir said.

The opposition didn’t prevent the Manufacturers Association of Israel, which says its members produce more than 95 percent of Israel’s industrial exports, from demanding the bank set a floor of 3.8 shekels to the dollar.


The group called on the central bank “to wake up out of its coma and use whatever means it has at its disposal to prevent the shekel from strengthening further.” Industrial exports in April and May were on average 9 percent lower than the monthly average for January through March, it said yesterday in a statement.

FXCM, a trading firm based in Tel Aviv, said the decision to hold interest rates unchanged “gave speculators incentive to buy the shekel.”

“Even if the decision was correct, the bank will have to deal with the risk inherent in the shekel’s appreciation,” it said.

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