Israeli shekel stabilized with promise of intervention

To a very sharp economic shock – the attack on Israel by the Hamas organization from the Palestinian enclave of Gaza – the Bank of Israel, the issuing bank and monetary regulator of Israel, responded by announcing the limits of the funds reserved for interventions to stabilize the exchange rate of the national currency, the shekel, on foreign sites. The limit (unannounced when spent) is, according to the Bank of Israel, $30 billion, or 15% of its own foreign exchange reserves, which amounted to about $199 billion in September (see chart). It has been announced that the program for providing foreign exchange liquidity through the swap mechanism will be expanded to $15 billion .

On the morning of October 9, the shekel rate against the US dollar fell to a seven-year low, from 3.86 to 3.95 shekels/$, by 2.8%. Since its local peak in March 2020, the Israeli currency has weakened by 10%. The reason for the decision to intervene at a conference on the morning of October 9, representatives of the regulator cited the sharp weakening of the overnight shekel exchange rate the day before on stock exchanges in Asia – it reached 4.3 shekels/$. In a statement, the Bank of Israel noted that interventions, if necessary, will be carried out on external trading platforms; the regulator’s only goal is to smooth out exchange rate volatility to ensure the normal functioning of financial markets. The Bank of Israel has not yet announced additional actions either in monetary policy or in regulation, with the exception of expanded requirements for the retail banking network – banks must transfer 25% of branches to “central” mode within 21 days, where they guarantee a full range of services in any security mode , introduced by the military authorities in Israel – the provision for network operation under emergency conditions, introduced in April 2010, has been activated.

The standard response of the central bank to such shocks is to temporarily limit the operation of the banking system and financial markets and increase the rate in order to avoid a banking panic. However, its risks in Israel are now absent, as well as significant risks of financial stability; there are no reasons for the increase in the key rate of the Bank of Israel (4.75% per annum, inflation year-on-year – 4.1%) – although the demand for government debt in the country has increased (state bonds were sold yesterday by $500 million). What is happening will most likely suppress the previously intensifying pro-inflationary trends – the final decision on the rate will be made on October 21 at a scheduled meeting at the Bank of Israel.

Dmitry Butrin