Bank of Israel: Currency Intervention Only If Market Fails, 2023.
Bank of Israel Governor Amir Yaron has stated that currency intervention to bolster the weaker shekel will only be considered if market failures occur.
This statement follows the central bank’s decision to maintain benchmark interest rates at 4.75% for the second consecutive month, aligning with market expectations. Yaron has hinted at the possibility of further interest rate hikes to combat inflation.
The US dollar has exhibited strength against the Israeli shekel, with an approximately 8% increase year-to-date, trading at 3.8 on a recent Tuesday and hovering near its lowest level since March 2020.
In an interview Dan Murphy, Yaron noted the evolving relationship between the shekel and foreign financial markets, emphasizing that this connection has weakened notably since the start of the year.
He pointed out that the market is grappling with determining the appropriate risk premiums, which have increased due to political and judicial changes in Israel.
The governor expressed the belief that the market should be allowed to assess these risk premiums, highlighting that markets have functioned relatively well in recent months despite the heightened uncertainty.
However, he also stated that if there are any market failures or significant movements that negatively impact inflation, the central bank possesses tools to address such situations.
When asked about the possibility of currency intervention, Yaron underlined the importance of allowing markets to dictate during this period of high uncertainty. He emphasized that currency intervention would only be considered if market failures were observed, reiterating the central bank’s preference for a market-driven approach.
In recent months, the shekel has experienced depreciation, largely attributed to Prime Minister Benjamin Netanyahu’s introduction of new legislation affecting the Supreme Court.
This move sparked nationwide protests, with opponents arguing that it diminishes the authority of Israel’s highest legal institution and opens the door to potential abuses of power and improper appointments.
Netanyahu defended the legislation, asserting that it would ultimately strengthen Israel’s democracy. He maintained that when the dust settles, people will see that the country’s democratic institutions have been fortified rather than weakened.
In summary, Bank of Israel Governor Amir Yaron has indicated that currency intervention to support the shekel will only be employed in the event of market failures. The central bank has kept interest rates steady despite hints of potential rate hikes to combat inflation.
The shekel’s depreciation is partly attributed to political and judicial changes in Israel, which have led to widespread protests and debates about the state of the country’s democracy.
Yaron emphasized the importance of allowing markets to determine risk premiums in this period of heightened uncertainty while reserving intervention measures for instances of market failure.
Following a series of interest rate hikes that began in April of the previous year, the Bank of Israel opted to maintain interest rates at their current level. These hikes had elevated rates from a historic low of 0.1%.
Bank of Israel Governor Amir Yaron expressed confidence that the central bank’s actions had been sufficient to pave the way for a return to target inflation levels in the first three months of the upcoming year.
Currently, inflation stands at 3.3%, but Yaron anticipates a potential increase to 4% in the next reading. He clarified that this projected increase should be expected as long as economic developments unfold as anticipated.
While Yaron expressed optimism about the trajectory of inflation, he also issued a cautionary note. The central bank is prepared to take action swiftly if any unforeseen surprises or significant currency fluctuations exert pressure on inflation dynamics.
Yaron emphasized the central bank’s unwavering commitment to maintaining price stability, underlining their vigilance in achieving the inflation target.
In summary, the Bank of Israel has refrained from further interest rate hikes after a series of increases that began in April of the previous year. Governor Amir Yaron is confident that these actions will facilitate a return to target inflation levels early in the following year, even though the current inflation rate is at 3.3%.
However, he remains watchful and ready to respond to any unexpected developments or currency fluctuations that may impact inflation dynamics, emphasizing the central bank’s dedication to ensuring price stability.
