Bank of Israel Governor Discusses Currency Intervention and Interest Rates
The Shekel’s Weakness and Market Failures
Bank of Israel Governor Amir Yaron stated that currency intervention to support the weaker shekel will only be necessary if market failures occur. These remarks were made after the central bank decided to maintain benchmark interest rates at 4.75% for the second consecutive month. Yaron has suggested the possibility of future rate hikes to combat inflation.
The US dollar has strengthened by approximately 8% against the Israeli shekel this year, reaching a rate of 3.8 on Tuesday. Yaron explained that the link between the shekel and international financial markets has significantly weakened since the beginning of the year, possibly due to increased uncertainty in Israel caused by recent judicial changes.
Yaron emphasized the importance of letting the market determine the appropriate risk premia associated with this increased uncertainty. However, if significant market failures or movements that hinder inflation occur, the central bank has the necessary tools to address them.
Central Bank’s Stance on Currency Intervention
When asked about the possibility of currency intervention, Yaron stated that the central bank strongly believes in allowing markets to dictate outcomes, especially during times of high uncertainty. Currency intervention measures would only be considered if market failures occur.
The shekel has depreciated in recent months following new legislation imposed on the Supreme Court by Prime Minister Benjamin Netanyahu. This decision has sparked widespread protests, with opponents arguing that it weakens the authority of the top legal court and opens the door to abuses of power.
Netanyahu, however, defended the move, asserting that Israel’s democracy has been strengthened.
Possibility of Future Rate Hikes
The Bank of Israel maintained interest rates unchanged after a series of hikes that started in April last year, when the rate was at a record low of 0.1%. Yaron expressed confidence that the central bank’s actions have been sufficient to bring inflation, currently at 3.3%, back to target levels in the first quarter of next year.
Yaron acknowledged that the central bank would not hesitate to raise rates again if unexpected events or significant currency movements put pressure on inflation dynamics. Ensuring price stability is crucial, and the bank remains vigilant and determined to achieve its inflation target.
