The Bank of Israel's key interest rate was lowered to 3.75% on Sunday. In the past few months the central bank has cut the price of money by 150 basis points, from 5.25% in the summer, but the foreign exchange market carries on regardless. The shekel-dollar rate resumed its fall today, and is again at a six-and-a-half year low.
Excellence Nessuah chief economist Shlomo Maoz has, in recent months, become the Israeli economy's prophet of doom, and one of the most outspoken critics of the country's economic leadership. Maoz, who fiercely criticized Governor of the Bank of Israel Stanley Fischer when he raised interest rates to their last peak, now calls on the Bank of Israel to intervene on foreign exchange trading because "the interest rate instrument alone is inadequate." "They may not know it yet, but in the end, they will intervene," Maoz predicts.
Will the exchange rate fall below 4/$?
"Without doubt, it will happen soon. It could be by the end of the week, or within two weeks, or more, but the shekel-dollar rate will fall below 4."
Several economists, including Fischer himself, have come out against the calls for intervention by the central bank in foreign exchange trading.
"There are quite a few countries similar to Israel in size and dependence on exports that have taken the step of intervening in trading in the past few years. Malaysia, South Korea, Singapore, and other countries come to mind. They intervened in trading and in effect rescued their economies.
"Although the Bank of Israel's foreign currency reserves are high, there is still room to enlarge them, something that hasn't been done for decades. It has to be taken into account that the Israeli economy too has grown in those years. The central bank's foreign currency reserves should grow in line with the growth of the economy. The Bank of Israel knows this as well."
But for the time being, Fischer is at least continuing to cut the interest rate.
"Interest rate cuts, in the way that Fischer has been making them, signal indifference and not an emphasis on the point that the bank is determined to get inflation back within the target range. The bank should have cut the interest rate faster."
Published by Globes [online], Israel business news - www.globes.co.il - on April 25, 2007
© Copyright of Globes Publisher Itonut (1983) Ltd. 2007