Bank of Israel seeks to prevent 'over-appreciation' of shekel

JERUSALEM: The Bank of Israel's decision to sharply raise its foreign exchange intervention is largely meant to help exporters survive until factors that boosted the shekel last year subside, deputy governor Andrew Abir said on Monday.

The central bank said on Thursday it planned to buy $30 billion of foreign currency in 2021 - up from $21 billion in 2020 and after the shekel, one of the world's strongest currencies, hit a 24-year peak of 3.11 to the dollar.

By Friday, the shekel had weakened to a rate of 3.28 but on Monday rebounded to 3.23 after a weekend where analysts questioned whether the policy would work to halt the shekel's gain of 10% versus the greenback since the start of 2020.

"We are trying to prevent an over-appreciation of the currency (shekel) in the short term that will make it difficult for companies when the exchange rate comes back," Abir told Reuters.

He would not rule out buying more than $30 billion, saying: "If we need to do more we will evaluate it at the time."

The central bank has said the shekel's strength partly stemmed from the dollar's weakness globally, but also from strong foreign currency flows into Israel amid growth in the current account surplus, direct investments, large-scale foreign currency sales by institutional investors against their investment profits in capital markets abroad, and an increase in foreign investment in Israeli government bonds.

Abir said the rise in the current account surplus was due to a sharp contraction in imports due to the COVID-19 crisis and that decline is expected to reverse in the second half of 2021. At the same time, he said, it is unlikely that foreign equities would greatly outperform local assets this year.

"So part of those factors that were behind the strengthening of the shekel may not be as firm in 2021," he said.

Exporters have complained that the strong shekel makes it tough to compete.

"If these forces start to peter out in the second half of 2021 and the exchange rate has strengthened in the interim, it may be too late for certain companies that will have already made the decision to shift their activities abroad or close," Abir said, citing an already large spike in unemployment due to the coronavirus pandemic.

Since 2008, the Bank of Israel has bought tens of billions of dollars of foreign currency to push its forex reserves to more than $173 billion. "We have enough reserves for a crisis. Now it's just a byproduct of monetary policy," Abir said.

He also said the central bank has moved into other monetary tools such as intervention, buying bonds and giving low rate loans to banks to lend to small businesses since the impact from interest rate cuts - the key rate stands at 0.1% - is limited.

"All these things are there to help the economy get through this difficult time. So that when we come out of it, we'll be able to come out of it with a relatively strong economy that will grow stronger," Abir said.