Revisiting Bank of Israel Monetary Policy

The Bank of Israel, which holds supreme control over Israeli currency policy, seems to have shifted gears from its breakthrough policy several years ago. Recently, the Bank of Israel has been reticent to intervene in currency management. As a result, the monetary policy of yesteryear that vaulted the Israeli economy into the prestigious Organization for Economic Co-operation and Development (OECD) in 2010 seems to be drifting into a policy that does not play to Israel’s economic strengths. While the current demands of the economy, not its historical needs, should dictate monetary policy, the dynamic that created the economic surge is still relevant. Consequently, current monetary policy is baffling.

Devaluing the Shekel

As discussed in a previous post (February 2, 2015), former Bank of Israel governor Stanley Fischer directed a currency devaluation in 2008, which sparked unprecedented economic success. Via the devaluation, Israeli exports became cheap due to the favorable exchange rate with the Shekel. In turn, Israeli exporters, primarily those involved in exporting technology, saw a flurry of activity due to its more competitively priced products. Since most of Israel’s export sales are settled in dollars, a broad-based exchange rate favorable to customers boosted exports. Israel then had the “startup nation” moniker that has come to define its economic tenacity.

The Bank of Israel’s balancing test with respect to other sectors of the economy has worked. Anytime a sovereign devalues its currency to boost export sales, its import market suffers and its domestic market usually sees higher prices. In balancing whether devaluation makes sense, a central bank utilizes a broad view lens to determine economic policy. The Bank of Israel, in contemplating all sectors of the economy, opted for the currency devaluation in 2008. The result was OECD membership.

Current Economic Policy

In late 2018, the Bank of Israel appointed Amir Yaron as its governor. As governor, Yaron takes full control of shekel utilization. Surprisingly, Yaron has not reconciled surging shekel value with the Israeli tech export market; instead Yaron’s policy, so far, has been to let the Shekel float.

In 2019, Shekel value surged 8%, per Globes. Despite exporter complaints and requests for Bank of Israel intervention, Yaron remained on the sidelines, citing the import and domestic markets.

The end of 2021 saw another surge, wherein the Dollar/Shekel exchange rate was at approximately $1/NIS 3.10. This is the strongest the Shekel has been since 1996 and far removed from the devaluation scheme of 2008.

In the meantime, the Bank of Israel has been active in purchasing foreign currencies in an attempt to slow the Shekel surge. While that may contain the Shekel somewhat, such action does not resolve the issue. Israel’s tech exporters, and in turn its economic engine, will continue to suffer until the problem, not the symptoms, is addressed.

Strong Currency Policy

The International Monetary Fund (IMF) has long instituted a strong currency policy since its inception in 1944. Per the IMF, competitive currency devaluations during the 1920s contributed significantly to the Great Depression and are therefore a hinderance to global stability. Where does the current Bank of Israel regime stand?

About the Author
Ari Mushell works in the banking industry.
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