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Amid increasing calls for the central bank to step up action to curb the shekel's sharp advance, including demands that interest rates be lowered further, Bank of Israel Governor Stanley Fischer on Wednesday reiterated his position that the currency must be viewed not only in the context of the US dollar and stressed that the central bank had no intention of intervening in the foreign exchange market to do so.
"It's not healthy," Fischer said about intervention at a press conference marking the release of the central bank's annual report for 2006. "It would change the nature of the market completely. If we intervene, instead of the market focusing on fundamentals, it will be wondering how we were feeling that morning."
Intervention is a technique used by central banks to affect the price of the local currency by either buying it to provide support or, in this case, by selling shekels in the open market, which would result in its depreciation.
Fischer's comments prompted another jump in the shekel, which climbed to a fixing of 4.1007 from 4.1264 late Tuesday.
Addressing the shekel's strength, Fischer repeated his often-stated belief that the currency really was exhibiting strength only against the dollar, which is experiencing a global slump, and that when compared with the currency basket and Europe it was stable. He also issued a reminder that the Bank of Israel has no influence over the dollar's performance.
With respect to altering interest rates to accomplish the deed, Fischer said the country was in a difficult position when it came to monetary policy as both economic and financial stability had to be protected while also keeping an eye on the inflation target, which was currently at 1% to 3%.
"As every change in the interest rate also affects, to some extent, the rate of growth and the prices of financial assets, in making our interest rate decisions we have to take into consideration the trade-off between these three factors - inflation, growth and financial stability. This is an essential consideration in the whole issue of monetary policy, and it will feature in our future decisions too, as it has till now," he said.
The central bank last month left its benchmark interest rate unchanged at 4% after having dropped the rate a total of 1.5 percentage points over recent months.
The latest call for action came Wednesday from the Israel Export Institute.
"The governor of the Bank of Israel cannot sit and do nothing, he must take responsibility and increase his involvement in what is going on in the foreign currency market," said the institute's Chairman David Artzi.
Fischer also indicated that the central bank was considering abolishing the dollar-shekel representative exchange rate it sets daily because it distorts inflation.
"We have received recommendations to eliminate it because it encourages the setting of prices, such as for apartments, in dollars, which isn't good for the economy," he said.
Commenting on the annual report, which the governor delivered to Prime Minister Ehud Olmert, Finance Minister Avraham Hirchson and acting President Dalia Itzik prior to the meeting with journalists, Fischer noted that in spite of the fact that 2006 was one of Israel's most successful years in economic terms, three areas remain that need "much work" - the relatively high unemployment rate, the large share of public debt in GDP and the high incidence of poverty.
"The continued success of Israel's economy depends this year on three main factors: developments in the global economy, over which we have no influence; the geopolitical situation, on which we have some effect; and continuation of the government's economic strategy as followed in the last few years, over which we in Israel do have control."
Separately, responding to questions from reporters, Fischer said it was not his decision to make as to whether Hirchson, who is the subject of a police probe, should be forced to give up his post but noted that Hirchson has been available to Fischer in his capacity as finance minister when he was needed.
"He's someone we can work with," Fischer said. "I didn't see his head wasn't with us when we delivered the report this morning."
Meanwhile, Fischer also said he expected the labor dispute with the central bank's workers would be resolved in "less than a month."
On April 1, a senior official at the bank had said the two sides were near an accord but for one issue regarding the overpayments, which employees had been asked to return. Also on that date, the judge overseeing the case ordered the sides to solve the issue by April 12 and set the next court hearing for April 15.