November 28, 2019 / 3:04 PM / 7 days ago

Israel cenbank prefers forex intervention to rate cuts for now - official

JERUSALEM, Nov 28 (Reuters) - Intervention in the foreign exchange market is currently the most suitable way to lift inflation and boost Israel’s economy, although interest rate cuts remain on the table, a voting member of the Bank of Israel’s monetary policy committee (MPC) said.

Andrew Abir, head of the central bank’s market operations department, said that at an annual rate of 0.4% in October, inflation remained well below a target of 1-3% and further appreciation of the shekel would make it more difficult to return inflation to its band.

“In the existing environment, what we thought in the recent meeting was the intervention tool is presently more suitable than further cuts in the interest rate or using other tools,” Abir told Reuters on Thursday.

The Bank of Israel on Monday held its benchmark rate at 0.25% for the eighth decision in a row, confounding expectations among analysts that it would cut borrowing costs for the first time in nearly five years.

Analysts figured the central bank would reduce the rate to 0.1% because the shekel had appreciated more than 7% versus the dollar in 2019 and 9% against a basket of currencies, helping to push inflation lower. At the prior meeting on October 7, policymakers voted 3-2 in favour of holding rates.

“The decision (this week) was not a decision not to reduce interest rates but for the moment acting in the exchange market may be more suitable. But we can always go back to reducing rates,” Abir said.

“Its not something we’ve taken off the table but for the moment there are other things we can do first that will possibly have more impact,” he said, adding rate moves have a long lag on impacting the economy.

For most of 2018 and 2019, the central bank let the shekel appreciate but with inflation falling to a rate of 0.3% by September from 1.5% in May, the bank decided to act — buying $314 million of foreign currency in October and many hundreds of millions in the last few sessions following the rate decision.

“There is limited room on interest rates while in theory there is unlimited room on acquiring U.S. dollars ... you can do as much as you like,” he said.

At the same time, “the barrier to reducing rates below zero is much higher than reducing it to zero or 0.1%,” he said.

VOLATILITY

He noted that for more than a year and a half, policymakers were “comfortable” with the exchange rate and did not deviate from a “wide” window where moves are justified by fundamentals.

Intervention will not occur, he added, “if it just deviates a few percent.”

The shekel has gain for a host of factors, including solid economic growth and a current account surplus. “Nine percent is a large move in a period when the dollar has been the strongest currency in the world except for ourselves,” Abir said.

The shekel on Thursday afternoon stood at 3.468 per dollar, after reached 3.4550 last week, its strongest since March 2018.

Abir said global central banks like the Federal Reserve and ECB have signalled a pause for now on further monetary easing.

“We want to prevent it from continuing to appreciate at the pace it’s been doing and we want to introduce volatility in the market,” Abir said, referring to the shekel. “We want two-way risk in the market. We want people to be worried that there may be times we reappear in the market suddenly.”

He noted the strong shekel continues to weigh on goods exports, even as service exports were strong. At the same time, the economy, growing around 3% a year, could take a hit from political uncertainty after two inconclusive elections in Israel and the indictment of Prime Minister Benjamin Netanyahu on corruption charges.

“The continuation of the caretaker government and its inability to implement a new budget or new economic planning will have a detrimental effect over the medium term,” Abir said. “The longer the present impasse carries on, the more worrying it will be.” (Reporting by Steven Scheer, Editing by William Maclean)

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