Foreign market interference is probably the most effective way to lift inflation and boost the economy of Israel, while interest rate cuts remain on the agenda, a voting member of the monetary policy committee of the Bank of Israel said.
Andrew Abir, head of the market operations department of the central bank, said inflation remained well below the1%-3% target at an annual rate of 0.4% in October, and further appreciation of the shekel would make it harder to return inflation to his band.
"In the current environment, what we thought was the intervention tool at the recent meeting is now more appropriate than further interest rate cuts or other tools."
For the eighth decision in a row, Monday's Bank of Israel held its benchmark rate at 0.25%, confusing analysts ' expectations that it would cut borrowing costs for the first time in nearly five years.
According to analysts, the central bank would lower the rate to 0.1 per cent because the shekel appreciated more than 7 per cent against the dollar in 2019 and 9 per cent against a currency basket, helping to push down inflation. Politicians voted 3-2 in favour of holding rates at the previous meeting on October 7.
"The decision[ this week] was not a decision not to lower interest rates, but it may be more appropriate for the moment to act on the exchange market. But we can always return to tariff reductions.”
"It's not something we took off the table but there are other things that we can do first for the moment that may have more impact," he said, adding rate movements has a long delay in impacting the economy.
The central bank made the shekel appreciate for most of 2018 and 2019, but with inflation falling to a rate of 0.3 per cent by September from 1.5 per cent in May, the bank decided to act— buying $314 million in foreign currency in October and many hundreds of millions in the last few sessions following the rate decision.
"There is limited room for interest rates, while theoretically there is unlimited room for US dollars to be acquired... You can do whatever you like, "said Abir.
At the same time, he said, "the barrier to lower rates below zero is much higher than to lower it to zero or 0.1 per cent."
He noted that policymakers have been "comfortable" with the exchange rate for more than a year and a half and have not deviated from a "wide" window in which fundamental moves are justified.
The intervention will not take place, he added, "if only a few per cent deviate."
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