Fischer hopes to reduce currency purchases

"One of the challenges we face is the management of monetary policy and... bringing interest rates back to a more normal level."

March 12, 2010 02:02
2 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

Bank of Israel Governor Stanley Fischer said Thursday he hopes to gradually reduce the central bank’s purchases of foreign currency as the global economy stabilizes.

“As a central bank in a small and open country, we cannot be indifferent to the exchange rate,” Fischer said at a Bank of Israel conference in Tel Aviv. “But as the global economy stabilizes, we hope to gradually reduce the need to intervene in the foreign-exchange market.”

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Last August, the central bank stopped buying $100 million a day and adopted a flexible policy that leaves room for intervention in cases of unusual fluctuations in the market. In recent months, the shekel continued to appreciate against the dollar, prompting the Bank of Israel to buy foreign currency but at reduced levels. It bought $209 million in February, after buying $1.56 billion in January, to bring its foreign-currency reserves up to $60.7b.

Fischer said he hoped to raise interest rates as the global economy improves.

“Looking to the future, one of the challenges we face is the management of monetary policy and the gradual process of bringing interest rates back to a more normal level, while keeping inflation within the price-stability target range,” he said. “In this context, we cannot set an interest-rate policy without taking into account of what is happening in the global economy.”

Fischer said the main concern for the global economy was Europe, especially Greece’s debt problems.

“The most likely scenario is that we are on the way out of the global crisis,” he said. “Growth rates around the world are slow, and there are differences between countries. Asia, led by China, is returning back to growth except for Japan. In the US there are points of weaknesses, but the likely scenario is a continuation of growth at a slower pace than it had been before.”

“The Israeli economy is coming back to growth but at a slower pace than seen before the crisis in the years 2004 to 2008, when the economy grew at an extraordinary fast pace of more than 5 percent, which is not stable for the long-term,” he said.

Fischer said he hoped the new Bank of Israel Law, which was approved by the Knesset Finance Committee on Wednesday, and is to be voted on in the Knesset next week, would come into effect soon.

“Part of the future of the Bank of Israel starts with the approval of the new Bank of Israel Law,” he said. “It will make the central bank more modern in setting targets, which are more appropriate for the 21st century.”

“However, our challenge remains the proper implementation of the law, which entails major changes on the decision-making process for interest rates through, for example, the establishment of a monetary committee replacing the role of the governor as the sole decision maker,” he said.

Deputy Governor Zvi Eckstein announced that the Bank of Israel would next year host a conference of the world’s central banks.

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