Governor of the Bank of Israel hints at intervening in the exchange rate of the dollar through interest rates

SadaNews Economy Translation - The Governor of the Bank of Israel, Amir Yaron, hinted on Tuesday at a quicker reduction in interest rates if the value of the shekel continues to rise.

In fact, the shekel has decreased against major currencies, while global markets experienced slight fluctuations, with the dollar rising to 2.852 shekels after recording 2.817 shekels earlier, and the euro jumping to 3.332 shekels.

Yaron stated at the Eli Horowitz Conference on Economy and Society: "It is clear that monetary policy is affected by events and the geopolitical situation, as it experiences sharp fluctuations, and there is no need to mention what happened .. The recent decision to lower the interest rate, which was reduced by a quarter of a percentage point today, reflects a balance between geopolitical risks - war versus reaching an agreement, rising energy prices versus their decline, and the rising value of the shekel versus its decrease."

He added, as translated by SadaNews Economy, that since the decision was made, expectations for reaching an agreement have risen, leading to a sharp decline in energy prices, alongside an additional decrease in the risk premium in Israel, and a further increase in the value of the shekel, all of which contributed to lowering inflation expectations.

Yaron noted that "although the retail market in Israel does not enjoy sufficient competitiveness, this overall rise in value can certainly lead to lower inflation, which is already reflected in the expectations."

The Governor of the Bank of Israel said: "I would like to emphasize that the lower the expectations, especially if they approach the minimum target, the more this justifies a more expansionary monetary policy and at a faster pace."

He pointed out that the shekel has indeed been declining since the outbreak of the war on October 7 and until the Beiger operation in Lebanon, coinciding with an improvement in the geopolitical situation, at which point the shekel saw a noticeable increase in value.

He added: "This rise was primarily affected by three factors: the decrease in the risk premium in Israel, the rise in the U.S. stock market, and the activity of financial institutions; the third factor is the global weakness of the dollar."

He continued: "The three main factors are financial, backed by factors related to Israel's resilience and ability to endure; in addition, there are influential structural factors: the first is customs barriers, which must be reduced; furthermore, the large volume of savings and tax distortions on capital gains, which tend to favor Israeli bonds, exacerbate the fluctuations of the shekel .. I would like to emphasize that we recognize the impact of this on the industry and exporters, and we will not underestimate this matter."

He continued: "Inflation has risen due to restrictions imposed on the labor market, and monetary policy has led to a decrease in inflation to an average level close to the target, while recent months have seen a noticeable rise in inflation globally .. I would like to talk about the recent interest rate decision, as the level of inflation was close to the average level, and this in itself is a positive and successful matter .. I remind you that wars lead to excessive inflation."