Israel's central bank is refraining from immediate intervention in currency markets despite a pronounced appreciation in the shekel, Deputy Governor Andrew Abir told Reuters on Monday. Abir said the bank views exchange-rate intervention as one tool among many but is not hurrying to deploy it while the strong shekel helps restrain domestic price pressures.
"Intervention is part of our tool box and has been relevant under certain circumstances," Abir said, referencing episodes when inflation was below the current annual rate of 2%. He underlined that the central bank is observing developments closely but sees no immediate need to act to weaken the currency.
The dollar-shekel pair is trading around 2.90, a level that Abir noted is the lowest since 1993. The deputy governor also said market participants appear to be too optimistic about the geopolitical outlook, a factor that may be contributing to the shekel's gains.
Abir framed the currency strength as a cushion that has given the Bank of Israel slightly more room to manoeuvre on policy. "What the appreciation has allowed us to do is give us slightly more degrees of freedom," he said, while cautioning that hostilities linked to the Israel-Iran conflict are not fully over even though a ceasefire is in place.
The Bank of Israel left its benchmark interest rate unchanged at 4% on March 30 for the second meeting running. At that time, central bank staff projected the rate would be between 3.5% and 3.75% in a year, and Abir reiterated that up to two interest rate cuts by next March remain expected.
Abir said the bank has already implemented a couple of rate cuts to date but has proceeded cautiously because of the uncertainty stemming from the war and broader geopolitical risks. He added that markets can overshoot on the upside, implying that some of the shekel's strength may reflect "over optimism" tied to the improved geopolitical environment.
That improved environment has, Abir observed, reduced Israel's risk premium and supported higher equity prices. The central bank is also monitoring the tight labour market as reservists return to the workforce, a dynamic that bears on inflationary pressures.
Despite the conflict with Iran, Abir said Israel has not experienced a marked rise in inflation. Still, the Bank of Israel remains attentive to potential fiscal policy shifts, expressing concern about a possible loosening of fiscal discipline as the country heads into the October election.
Context and outlook
Abir's comments underscore a balancing act for the Bank of Israel: allowing currency appreciation to help bring down inflation while remaining vigilant against complacency in markets and risks from fiscal policy and ongoing geopolitical uncertainty.