The Bank of Israel will purchase $ 30 billion in 2021. The advance notice of the volume of purchases is intended to provide the market with certainty about the Bank’s commitment to deal with the sharp appreciation that has recently taken place, thus supporting the economy’s continued to deal with the economic consequences of the corona crisis.
In recent months, the inflows of foreign currency entering the Israeli economy have intensified, against the background of the increase in current account surpluses, direct investments, high-volume foreign exchange sales made by institutional investors against the profits of their investments in capital markets abroad, and increased foreign investment in government bonds Israel, also as a result of Israel joining the global bond index WGBI.
These factors contributed to a significant appreciation of the shekel, which was also affected by the weakening of the world dollar, against the currencies of many other countries. Against this background, and in order to mitigate the negative impact of the appreciation of the shekel on economic activity in the Israeli economy during the corona crisis, the Bank of Israel increased the scope of intervention in the foreign exchange market and purchased a total of approximately $ 21 billion in 2020.
The Monetary Committee estimates that in order to support the achievement of the Bank of Israel’s goals and the recovery of the economy from the corona crisis, and in particular to support the export and import substitutes industries, it will be necessary to continue to intervene in the foreign exchange market extensively in 2021.
Following a series of discussions in recent days, and in order to increase certainty about the Bank of Israel’s involvement in the foreign exchange market in the coming year, the Monetary Committee decided on a change in foreign exchange market policy. The committee announces that in 2021 the bank will purchase $ 30 billion in the foreign exchange market. This amount is significantly larger than the bank’s intervention in the past and the bank’s estimates of the expected current account surplus this year so that acquisitions will also moderate. Leading to a devaluation of an inconsistent magnitude with the achievement of the Bank’s targets in the area of price stability and financial stability.
Towards the end of 2021, the Bank will announce the intervention policy in 2022, in line with developments in the real economy and the labor market in particular, in the financial markets, and in the inflation trend, and with regard to estimates of the exit route of the economy.
Dudi Reznik, An interest rate strategist at Leumi Capital Markets, refers to the Bank of Israel’s announcement and says that “this is a step designed to provide certainty to the market regarding the scope of the intervention. This is a high intervention volume close to 50% of purchases in 2020 The highest purchases in over a decade, averaging $ 2.5 billion a month, a high volume, but it is not certain that such a volume will lead to a turnaround in the foreign exchange market.
The forces for the appreciation of the shekel continue to be strong, and in addition the fact that Israel is leading the world in the immunization trend may continue to strengthen the shekel in the near future. The shekel, which is trading around a level of NIS 3.115 per dollar before the announcement, is currently trading around a level of NIS 3.14 per dollar. It also seems that the market is not currently convinced that a change in the Bank of Israel’s policy will lead to a significant change in foreign exchange trading. “