Steinitz: We need a reasonable interest-rate spread

“We cannot let the shekel become the strongest currency in the world. We need to participate in what has been called the currency war,” finance minister said.

Yuval Steinitz 311 (photo credit: Ariel Jerozolimski [file[)
Yuval Steinitz 311
(photo credit: Ariel Jerozolimski [file[)
Finance Minister Yuval Steinitz said Tuesday he supports the Bank of Israel’s interventionist policy into the currency market but warned about lifting the base lending rate too high.
“We cannot let the shekel become the strongest currency in the world. We need to participate in what has been called the currency war,” he said at a socioeconomic conference organized by the Industry, Trade and Labor Ministry near Ben-Gurion Airport.
“There are central tools. The move by the Bank of Israel to buy dollars was right. However, we need to try and maintain a reasonable interest- rate spread between us and the US. If the interest rate spread widens, there is a shift of the US currency to places where the interest rate is higher. So we need to be careful not to lift the rate too high in comparison with the rates in Western countries.”
On Tuesday, the shekel weakened 0.6 percent against the dollar and closed at NIS 3.62, from NIS 3.59 on Monday. Since the beginning of the month, the Bank of Israel has bought more than $1 billion to stem the sharp appreciation of the shekel. The central bank’s currency reserves amounted to $66b. at the end of September, when the Bank of Israel raised the base lending rate by 25 basis points to 2%. Major economies including the US have not yet started to lift rates.
Speaking at the conference, Industry, Trade and Labor Minister Binyamin Ben-Eliezer called for taking aggressive steps to limit the activities of currency speculators operating in the foreign-exchange market.
“It is clear that today the determination of the exchange rate is exposed to pressures and influences by interested groups,” he said. “I am in favor of using aggressive steps to limit the ability of currency speculators and other interested parties, who have an impact on the exchange rate and aim to make capital gains on the back of the Israeli economy. Such steps will narrow the uncertainty in the currency market, help exports and boost economic growth.”
Ben-Eliezer said Israel has taken upon itself to be governed by policy rules accepted in developed countries that enable a limited interventionist policy in determining the exchange rate.
“The policy has proven itself and has helped the development of the economy and its participation in the global economy,” he said. “However, the policy has narrowed the possibilities of influencing various forces in the market.”
In the past, proposals for antispeculation measures have been proposed, including hedging on Israel’s foreign debt or requiring banks to demand higher margins from foreign players in the market.
Likud MK Haim Katz is sponsoring a private member’s bill that would impose a 35% tax on profits from foreign-currency speculation of a minimum of NIS 100,000 generated through a limited period of nine months.
Commenting on the real-estate market, Steinitz said the problem of a sharp rise in prices and shortage of supply in apartments would not be solved in the coming months.
“There has been an increase of 20% in new building starts over the past six months,” he said. “But this is not enough to solve the problem. We need at least 50%. To flood the market with land for thousands of new constructs, it will take one or two years.”
Construction and Housing Minister Ariel Attias said despite the recent interest-rate hikes, the base lending rate was still too low to keep investors out of the real-estate market, while a higher rate would hurt the ability of young couples to buy an apartment and damage exports.
“We need to continue to boost the supply of housing,” he said. “This year we have already doubled the volume of tenders from marketing 15,000 apartments to 30,000. But this is not enough. A solution to curb demand would be if a distinction was made between conditions for the acquisition of a first apartment and tougher conditions of a second apartment.”
Steinitz said a slow and even painful recovery in the US and Europe would have an impact on the Israeli economy.
“We came back [from the International Monetary Fund conference in Washington] with mixed feelings,” he said. “The global crisis has not passed, we are not back to normality and we need to be cautious about celebrating, even though the local economy is growing,” said Steinitz.
Steinitz said many developed countries were struggling with three major problems: high unemployment, huge deficits and a lack of investments.
“Despite liquidity and credit availability, there is a lack of investments into the industry, mainly because of uncertainty in the global economy in general and the prospect of an increase in taxes in particular,” he said.