Bank of Israel Governor Stanley Fischer: Exporters.
(photo credit: Ariel Jerozolimski)
The central bank cannot beat the market and will not
continue to buy foreign currency forever, Bank of Israel Governor
Stanley Fischer said Wednesday.
"Exports are fundamental to the development of the
local economy," he said at a session of the Knesset Finance Committee.
"But we all know that in the long term, central banks are not able to
beat the market. During the recession we had an impact on the exchange
rate, and as result our recession was shorter than the global one."
Fischer said exporters needed to adapt to a
reality in which the central bank cannot prevent market forces from
affecting the foreign-exchange rate.
On Monday, the Bank of Israel announced that it would "act in
the foreign-exchange market in the event of unusual movements in the
exchange rate that are inconsistent with underlying economic
conditions, or when conditions in the foreign-exchange market are
disorderly." After the announcement, increased dollar purchases boosted
the dollar-shekel exchange rate by more than 5% to a representative
rate of NIS 3.88 on Wednesday.
Since the central bank started to buy foreign
currency in March 2008 to help stem the dollar slide, foreign-currency
reserves have been pumped up to $52 billion at the end of July, up from
$32b. in July last year.
"There is a cost to holding reserves, but there is also an
advantage and a gain," Fischer said. "A country with large reserves is
more secure to weather economic shake-ups around the world. In this
crisis, countries with larger reserves like Brazil
cope with their problems better than countries with lower reserves."
According to Daniel Tenengauzer, an analyst at
Bank of America-Merrill Lynch, instead of weakening the greenback
against the shekel, the central bank's dollar-purchase program has
supported the shekel.
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"Ironically, the dollar-purchasing program initiated by the
central bank has contributed to strengthening the country's macro
fundamentals, through an improvement of the foreign-currency reserves
position," he said in a report Wednesday. "We are now bullish on the
shekel, as we think that Israel is well-positioned to exit the crisis
on a strong footing."
Tenengauzer said despite a sharp drop in export performance,
the economy has proved relatively resilient, and there were signs that
the macro outlook has improved. He forecast the dollar-shekel exchange
rate to weaken to 3.55 by year-end and continue depreciating in the
first half of next year.
"As an illustration of that, the Bank of Israel recently
announced that it would stop buying government bonds," Tenengauzer
wrote. "The next step should be an interruption of the
foreign-exchange-reserves accumulation program, which will ultimately
provide some support to the shekel.
"Our key risk to our bullish call is the adverse fiscal
dynamics that may weigh on investor sentiment and credit ratings down
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