Bank of Israel to buy $30 billion in forex in 2021 to curb shekel rise

The Monetary Committee at the Bank of Israel said on Thursday that it plans to buy $30 billion in the foreign exchange market over 2021 in a bid to stem the appreciation of the shekel.

“The advance announcement of the scope of the purchases is intended to provide the market with certainty regarding the Bank’s commitment to dealing with the recent sharp appreciation, and thus support the economy’s continued dealing with the economic ramifications of the COVID-19 crisis,” the central bank said in a statement.

After the announcement, the currency weakened to NIS 3.1900 to the dollar, after the representative rate was set at NIS 3.1160/$ before the announcement.

In recent months, foreign currency flows into Israel’s economy have intensified, against the background of the growth in the current account surplus, direct investments, large scale foreign currency sales by institutional investors against their investment profits in capital markets abroad, and an increase in investments by nonresident investors in Israeli government bonds.

These factors contributed to a marked appreciation of the shekel, which was also impacted by the weakening of the dollar worldwide against many other currencies, the statement said. The shekel advanced some 7.5% against the dollar in 2020 and was trading at a 24-year high on the dollar on Thursday.

Illustration photo of the new 100 Israeli shekel bill. December 31, 2017. (Nati Shohat/Flash90)

Against this background, and to moderate the negative effect of the shekel’s appreciation on Israeli economic activity during the coronavirus crisis, the Bank of Israel increased the scope of intervention in the foreign exchange market, and in 2020 bought a total of approximately $21 billion in the foreign exchange market.

Amir Yaron has also repeatedly said that the central bank will continue to intervene in the market in 2021 as well to stem the rise of the shekel, which could hamper economic recovery as businesses struggle with the impact of the coronavirus lockdowns.

“To support the achievement of the Bank of Israel’s objectives and the recovery of the economy from the coronavirus crisis, and in particular to support employment in export industries and import substitute industries, continued foreign exchange market intervention at a broad scope will be required in 2021,” the Monetary Committee said.

After a series of discussions held over recent days, and to increase the certainty regarding the Bank of Israel’s intervention in the foreign exchange market in the coming year, the Monetary Committee decided to change its foreign exchange market policy, and signal to the market in advance its determination to curb the shekel rise by announcing how much it plans to intervene in the market, the statement said.

The $30 million amount “is markedly larger” than the bank’s intervention in the past, the statement said.

“The purchases will continue so long as they do not lead to a depreciation,” which is consistent with the Bank’s price stability and financial stability objectives, the statement said.

Toward the end of 2021, the bank will announce its intervention policy for 2022, the statement said.

The Bank of Israel announcement illustrates the fact that “it continues to be a very major player in the foreign exchange market,” and just the announcement of its intention to buy dollars, without any actual purchases being made “has pushed the dollar so far to an increase of more than 8 agorot,” said Itai Yosha, the head of the foreign options desk at Bank Hapoalim Ltd.

Following the actual purchase of the $30 billion in foreign currency, “by the end of the year the total foreign exchange reserves of the Bank of Israel will exceed the $200 billion threshold, and will now constitute more than half of Israel’s GDP,” Yosha said.

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