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Israel Asks Itself How Long It Can Sit on the Shekel

Central bank is willing to do more but lawmakers say it's time to look to the future.
Mixed denomination of Shekel currency banknotes and coins.
Photographer: Ariel Jerozolimski/Bloomberg

Bank of Israel Governor Karnit Flug wants currency markets to know something: that so-called reserve ceiling they believe the central bank is about to hit is not really a ceiling at all.

In recent months traders have piled into the Israeli shekel, sensing the time has come for the central bank to give up on keeping it artificially weak through an eight-year foreign-currency purchase program that was started under now Fed Vice-Chairman Stanley Fischer when he was governor.

The “speculative wave,” as some Bank of Israel officials described it, came after stellar growth numbers for the fourth quarter and as traders began to sense policy makers may have to retreat from buying dollars as it nears limits on its holdings that it set for itself. Reserves reached $103 billion in March and the upper range is $110 billion.

Flug, however, says there’s still plenty of room to go. Making the case at a parliamentary meeting last month, she held up this chart to show that while Israel is a big holder of reserves, it's not the biggest, and signaled the bank is prepared to exceed the top end of its range for monetary policy purposes.

The flexibility offered by the lack of any fixed limit on the shekel is also helping Flug. It stands in contrast to the Czech central bank which was compelled to ditch its koruna cap this month after resurgent price growth rendered the policy obsolete.
The question is, how long can she keep it up? For now, the Israeli public, the business sector and members of parliament are all supportive. The country relies on exporters to power its economy, with sales abroad making up one-third of gross domestic product. If the currency were to rise too quickly, thousands of manufacturing jobs could be lost, pushing it into recession.

But the central bank can’t keep holding back the shekel forever. The official who helped design the program himself turned against it in February, arguing that keeping up the policy for too long can create economic distortions.

Tamar Zandberg, a member of the Meretz opposition party who helped organize the parliamentary hearing on the shekel last month, says that while she supports policy, more has to be done by the finance ministry to help train workers and prepare manufacturers for the inevitable.

“We understand the central bank is trying to protect the economy and we are supportive of that,” Zandberg said in an interview. “But we can’t leave it all up to them and pretend that parliament has no role in this. We need to monitor the situation ourselves, and if need be, come up with other solutions to this problem.”