Officially, today's unexpected measures by Governor of the Bank of Israel Prof. Stanley Fischer are intended to combat what is known as the Dutch disease - a structural strengthening of the exchange rate following the discovery of natural resources. The direct significance of the Bank of Israel's announcement is that it will not wait for the official operation of the sovereign wealth fund, and that it will buy $2.1 billion in foreign currency, which will be managed separately from the foreign currency reserves. In effect, the sovereign wealth fund was created today.
The Bank of Israel could have been satisfied with a dramatic announcement of foreign currency purchases over the coming years, in the hope that this would halt the appreciation of the shekel. There was a clear advantage to this: direct foreign currency purchases would have no effect on the terms of mortgages, which is important when real estate prices are rising again.
But Fischer was not only facing natural gas discoveries, but also the European Central Bank's decision to buy government bonds and quantitative easing. As far as he was concerned, there was no choice but to add an interest rate cut to the foreign currency purchases. It was important for him to deal with the central bank's veteran "clients" - all the players in the foreign currency market who gambled on the appreciation of the shekel. The timing of the announcement, and not just its content, were his signals that he will continue to support the exchange rate on the eve of leaving office.
This is not the first time that Fischer has targeted foreign currency players who gambled on the strengthening of the shekel. Over the years, he has bought foreign currency to counter short-term capital movements, and he usually won these battles. On several occasions, he took care to remind the market players that the possible effects of an interest rate cut on the housing market would not deter him if it was necessary to protect Israeli exports. This time, he kept his word, and, not for the first time, the price will be paid by the investors who were bullish on the shekel.
Published by Globes [online], Israel business news - www.globes-online.com - on May 13, 2013
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