The Bank of Israel took the capital markets by surprise on Monday and left its base lending-rate unchanged at 0.25%. No less surprisingly, it also intervened in the foreign currency market in big way to weaken the shekel.
The bank didn’t say how much foreign currency it bought, but market estimates are that the amount was significant, causing the shekel-dollar rate to gyrate towards the end of the trading day.
The representative rate for the dollar was fixed on Monday at 3.461 shekels, but about an hour later – at 4 P.M. local time when the rate decision was announced – the greenback weakened to 3.45. With the Bank of Israel’s intervention, the dollar climbed back up to 3.467 an hour later.
The interest-rate decision came in defiance of market expectations, with a large majority of economists surveyed by Bloomberg and Reuters predicting a cut to 0.1%. At the previous meeting of the bank’s monetary policy committee in October, two out of five members had voted for lowering the rate and the balance was expected to tip in its favor of a cut on Monday.
The economic survey the central bank released together with its rate decision seemed to make the case for a rate cut, but the monetary committee opted in the meantime for intervention instead.
Amir Yaron, the bank’s governor, had said in recent months that the bank would intervene in the exchange rate if “it diverged materially from the window that we have defined.” It appears that the committee on Monday thought that time had come.
In the last 10 days, the euro has traded in a range of 3.81-3.84 shekels and the dollar at 3.45-3.48, its lowest since the start of 2018. Year to date, the dollar has lost 7.7% against the shekel. The effective nominal rate, which is comprised of a basket of trade-weighted currencies, has fallen an even sharper 9%.
Buying more forex will add to the huge foreign currency reserves the central bank has already amassed. At the end of October they reached $121.4 billion after the Bank of Israel bought more than $300 million in forex in an effort to stem the shekel’s strength.
The Manufacturers Association, many of whose members are exporters being hurt by the Israeli currency’s strength, quickly praised the intervention. “We’ve lost valuable time and industry has suffered major damage. From now on, we expect to see aggressive intervention,” it said.
The change in the Bank of Israel’s intervention policy appeared inside the rate announcement on Monday. While saying the monetary committee had opted not to cut interest rates, it said it was “taking additional steps as necessary to make monetary policy more accommodative.”
That phraseology is slightly different from what appeared in the October decision, in which the central bank spoke about taking such steps in the future, if needed. It also reiterated that “it will be necessary to leave the interest rate at its current level for a prolonged period or to reduce it.”
Many economists said the wording pointed to a rate cut soon, perhaps at the next monetary committee meeting January 9. In the meantime, they noted, the relatively high 0.25% rate gives the bank some ammunition in case the Israeli or world economies turn worse or the shekel strengthens.
In any case, for now the committee said it believes Israel’s economic situation remains good. “Economic activity continues to grow at close to its potential rate, despite the negative global sentiment,” it said.
It also addressed political uncertainty in Israel amid growing indications that voters will be going to the polls for the third time in a year.” If the government is forced to operate on a continuance budget for a prolonged period, it may have a contracting effect,” the bank said, referring to the inability of the Knesset to approve a 2020 budget until a new government is formed. That means government spending will continue along the lines of the 2019 budget.
The last time the Bank of Israel lowered the base rate was at the start of 2015 when it cut it to 0.1%, its lowest ever. It remained at that level until last November, when the monetary committee raised it to 0.25% in what was supposed to be the beginning of a series of hikes. However, the bank retreated from that earlier this year amid falling inflation and a trend toward lower rates at the central banks overseas, most notably the U.S. Federal Reserve.