Bank of Israel may resume forex intervention, Abir says

The Bank of Israel may resume intervention in the foreign exchange market if the shekel's appreciation continues to push inflation lower, a senior official said in an interview published on Tuesday.

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JERUSALEM, Aug 13 (Reuters) - - The Bank of Israel may resume intervention in the foreign exchange market if the shekel's appreciation continues to push inflation lower, a senior official said in an interview published on Tuesday.

The shekel ILS= has gained nearly 7% versus the dollar this year. Manufacturers have called on the central bank to restrain the currency, since a stronger shekel makes Israel's exports more expensive and its imports cheaper.

Annual inflation eased to a 0.8% rate in June from 1.5% in May, below the government's 1% to 3% target range.

Andrew Abir, head of the Bank of Israel's Market Operations department, said the bank is carrying out the same policy.

"If it seems that we are not meeting the inflation target -- one of the causes being the shekel's appreciation -- and if it seems the exchange rate is moving away from what it should be according to the fundamentals of the economy, then we will go back to intervening in the foreign exchange market," Abir told Israel's TheMarker newspaper.

"The appreciation we have seen since the beginning of the year raises questions about our ability to meet the inflation target," he said.

Abir is the second voting member of the central bank's monetary policy committee in a week to express concern over the shekel's strength.

"If we believe the shekel is out of the range we have in mind, the central bank will intervene," Moshe Hazan told Reuters. "Intervention is on the table and if we see the shekel moving out of the range we have in mind we will definitely intervene."

Analysts are split over the need for intervention, questioning whether central banks can effectively fight the market. The Bank of Israel has bought $90 billion in foreign exchange over the past 11 years.

Abir said the bank has not intervened significantly since January because inflation had moved back into the target range. He noted that it was tough to determine the correct level for the shekel.

"We do not want to change the exchange rate trend and create artificial depreciation -- but to make sure there is no significant deviation from the equilibrium, especially at a time when the inflation target is deviating," he said.

Israel's strong economy is one factor in the shekel's strength, but Bank of Israel Governor Amir Yaron said last month that interest rate increases were possible in the coming months, when other central banks were loosening policy. That led to a disconnect in what the Bank of Israel was saying and what markets believed.

Yaron on July 31 backtracked and said there would be no rate increases for "an extended period", followed by a Federal Reserve rate cut. Still, the shekel has not weakened and stands at a 16-month high of 3.49 per dollar. It is also up more than 8 percent this year against a basket of currencies of main trading partners.

(Editing by Peter Graff)

((peter.graff@thomsonreuters.com;))

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