Finance counsels

The Bank of Israel expects to intervene in the foreign currency market only in “rare'' circumstances, Governor Stanley Fischer said, days after its first such action in more than a decade.

It will do so only to stabilize the market and won't target a particular shekel exchange rate, Fischer told a news conference today in Jerusalem.

The Bank of Israel bought dollars last week after the shekel strengthened “very quickly'' against most world currencies, Fischer said, indicating the local currency market wasn't “anchored well'' and that there was evidence of a “herd mentality.''

“We will continue to rely on the market except under exceptional circumstances,'' he said. “We hope intervention will be rare.''

Fischer is trying to balance efforts to control inflation, which has risen to above the government's target for the past three months, with concerns about a slowing economy. A strong shekel likely will crimp Israeli exports at a time when the U.S. is leading a deceleration of the global economy.

Israeli economic growth will probably moderate this year to its slowest since 2003, as world economic growth drops, according to the Bank of Israel. Its forecast sees growth in a range of 3.6 percent to 4.4 percent, compared with a preliminary 5.3 percent in 2007. The International Monetary Fund last month cut its estimate for 2008 to 3.5 percent from 4 percent.

`Successful' Intervention

Citing the market's “exceptional behavior,'' the central bank bought foreign currency on March 13 and 14, the first time it had entered the market to influence the exchange rate since 1997. The move came after the shekel appreciated to 3.3531 to the dollar on March 13, its strongest in about 11 years.

It closed at 3.4650 to the dollar on Friday, March 14. The shekel doesn't trade on Sundays.

The decision to buy dollars was “successful,'' Fischer said today.

The Israeli currency had appreciated as much as 14 percent against the dollar since the middle of December, unaffected by a 0.5 percentage point reduction in the Bank of Israel's base rate to 3.75 percent on Feb. 25.

While the shekel has been appreciating gradually due to Israel's economic growth rate, during the three days before the intervention, the shekel began to strengthen rapidly, leading to the decision to enter the market, Fischer said.

`Correct Step'

He declined to say how much foreign currency the bank had purchased.

It will soak up the excess liquidity created by the intervention by selling Treasury bills and bonds, Fischer said.

Asked about media reports that the central bank may cut its benchmark rate by 1 percentage point at its next meeting, Fischer said discussions haven't yet begun and that “a lot could happen'' before March 25, the day the announcement is scheduled to be made payday advance.

Fischer took the “correct step'' by not precluding further forays into the market and by avoiding any signals about where he wants the shekel exchange rate to be, Shlomo Maoz, chief economist an Excellence Nessuah Securities & Investments Ltd. in Ramat Gan, Israel. Fischer probably will cut the base rate by no more than 0.25 percentage point, Maoz said.

“Interest rate cuts and intervention aren't enough. He has to coordinate with the Finance Ministry, which should issue medium-to long-term bonds to absorb the increased demand for the shekel,'' Maoz said. “Israel faces an inflationary threat, but it is less of a problem than maintaining economic growth.''

Cut Rates?

Bank of Israel officials are divided about whether to continue buying dollars or cut the base lending rate, to stem the strengthening of the shekel, Yediot Ahronot reported today, without saying where it got the information.

While the central bank will probably enter the market again tomorrow, many officials at the central bank support the alternative of an interest rate cut of between 0.5 percentage point and 1 point to weaken the shekel by reducing the rate differential with the U.S., Yediot said, in article published before Fischer's press conference. They say buying dollars will inject more shekels into the economy, boosting inflation, the newspaper said.

The shekel doesn't trade on Sundays. The yield on the government's Shahar bond due in 2016 fell to 5.33 percent today, its lowest since July, amid expectations that the Bank of Israel will lower interest rates again when it meets on March 24.

Watching the Fed

At the current shekel-dollar exchange rate, the Bank of Israel will probably cut the interest rate by 50 basis points, Leader & Co. said today in a note to investors. It said the central may be able to “halt or at least slow'' the shekel's gains by buying dollars.

Psagot Investment House Ltd. said Fischer may opt for a rate reduction of as much as 1 percentage point before the next scheduled rate decision.

Among Fischer's concerns is how the U.S. Federal Reserve will act this week. The Fed has lowered its benchmark rate five times since September to 3 percent from 5.25 percent, and a survey of 85 economists by Bloomberg shows 56 percent expect a 1 percentage point cut to 2 percent and 44 percent expect a 75 basis point reduction to 2.25 percent on March 18.

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