This representation taken on August 23, 2022 shows a view of the exterior of the headquarters of the Bank of Israel, the country’s central bank, in Kiryat Ben-Gurion in Jerusalem.
Ahmad Gharabli | Afp | Getty Models
Bank of Israel Governor Amir Yaron said Tuesday that currency intervention to support the weaker shekel when one pleases only be necessary in the event of market failures.
His comments come shortly after the central bank held benchmark moment rates steady at 4.75% for the second consecutive month, in line with market expectations, although Yaron has tipped that further rate hikes may be necessary to bring inflation down.
The U.S. dollar is roughly 8% stronger than the Israeli shekel year-to-date, buying at 3.8 on Tuesday and hovering near its weakest level since March 2020.
“The shekel has had a long relationship with the pecuniary markets abroad, it has been tied to that. That link has weakened significantly since the beginning of the year. And we are considering the market is trying to figure out the appropriate risk premia that’s associated with the increased uncertainty in Israel that has quite come about with the judicial changes,” Yaron told CNBC’s Dan Murphy.
“We believe that we should let the hawk try to figure out that risk premia,” he added, noting that markets appear to have “functioned well” in latest months despite the increased volatility.
“However, if there will be market failures, which we have not seen for this far or very significant movements that really impede on inflation, then we have the tools to deal with that.”
Invited whether this meant the central bank would consider currency intervention measures if necessary, Yaron answered: “We believe very strongly that we should let markets dictate, especially in this period of high uncertainty.”
“Unqualifiedly, only if we see market failures, this is the point where we believe we should use those kind of tools,” he added.
The shekel has devalued in recent months following Prime Minister Benjamin Netanyahu’s decision to impose new legislation on the Supreme Court.
The touch sparked mass protests nationwide and opponents of the legislation argue that it substantively weakens the purview of Israel’s top authorized court and paves the path for abuses of power and improper appointments.
Netanyahu has defended the move, telling NBC News go the distance month that “when the dust settles, people will see Israel’s democracy has strengthened and not weakened.”
More evaluate hikes to come?
The Bank of Israel on Monday kept interest rates unchanged after a series of hikes derived the rate up from a record low of 0.1% in April last year.
Yaron said he expected that the central bank had done reasonably to allow inflation, which currently sits at 3.3%, to come back to target levels in the first three months of next year.
“I need to be clear, the next reading will probably put us at 4% inflation rather than the 3.3% which we are now at and as long as the improvements come through the way we expect them, this should be enough.”
Yaron said, however, that the central bank last will and testament “not hesitate to raise rates again” if there are any surprises or significant currency moves that put pressure on inflation dynamics.
“Guerdon stability is critical, we are vigilant and determined to get inflation back to its target,” he added.
— CNBC’s Ruxandra Iordache contributed to this check in.