These days, the Governor of the Bank of Israel, Prof. Amir Yaron, faces a very difficult dilemma. On the one hand, raising the interest rate succeeded in slightly curbing the inflation that has been rampant over the past year and a half. On the other hand, the weakening of the shekel against foreign currencies, when the dollar breaks a record and begins to approach NIS 4, requires the Governor to recalculate.
In the coming days, the Governor will have to make a decision on what to do regarding the interest rate, and market assessments are that the Governor will decide to raise the interest rate again or leave it at the same level as it is today, when the exchange rate stands at 4.75 percent. No one even dreams of a decline in the interest rate in the current situation, but I have been arguing for a long time that the environment of such a high interest rate is dangerous for the Israeli economy, and that the Governor must find other solutions, such as using the reserves of dollars purchased by the Bank of Israel in recent years when the shekel was strong.
Worry and anxiety about the situation
In the ongoing conversations I hold with many large importers and with the heads of the business community in the economy, I have recently heard from them the concern and anxiety surrounding everything that is happening in the economy. You have to understand, this is a very serious concern to the point of even a recession. The high-tech locomotive has stopped, and while there is an impression around the world that the market is recovering, in Israel the signs are worrisome. Central Bureau of Statistics data showed a decline in consumption, imports, and investment, real estate is also almost completely halted, and as long as the political situation in the country is unstable, the entire economy is liable to remain in a state of uncertainty.
The shekel weakened, Photo: Getty Images/iStockphoto
As a result, the role of the Governor of the Bank of Israel is very sensitive, and the dilemma facing him is real and weighty. The citizens of Israel will feel both choices in their pockets immediately: a continued increase in the dollar will hurt importers first of all and soon consumers as well, because prices will rise immediately, while an additional increase in the interest rate in order to combat the same price increases due to the depreciation of the shekel this time will lead to an increase in mortgage prices and further burden the entire economy.
Unfortunately, there are actually those who are exerting pressure from the opposite direction in favor of depreciation of the shekel, and they are institutional investors and investors, who are increasing exposure to foreign currency in the belief that the trend of depreciation of the shekel will continue for a certain period of time, during which time they will be able to derive the coupons and make their profits. The Governor should ignore these background noises and act quickly to stabilize the dollar exchange rate around NIS 3.5.
Make fateful decisions
In my opinion, and although there are those who would say that this is a certain risk, the Bank of Israel needs to release from the reserves of billions of dollars that it purchased during the years when the dollar was trading around NIS 3.2, and start satisfying market demand. Such a move is likely to stop the rise of the dollar exchange rate without the Governor having to make a fateful decision regarding the interest rate.
The Governor's temptation to raise the interest rate is very great, certainly if the dollar continues at the same pace of increase in recent weeks, but the Governor must make a brave decision and act to stabilize the dollar exchange rate in other ways.
The writer is president of the Institute of Certified Public Accountants in Israel and owner of Schreiber & Schreiber CPA firm
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