The Bank of Israel is instituting an exceptional plan to increase Israel's foreign currency reserves, just one week after shocking the market by suddenly reversing policy and intervening in the foreign currency market.
In a plan almost without match around the world, Governor Stanley Fischer aims to increase Israel's foreign currency reserves by $10 billion in two years, by buying an average of $25 million every business day during that time, all on the Israeli capital market. The plan, which Fischer has been discussing with government officials for weeks, will come into force on Monday.
Fischer advised Prime Minister Ehud Olmert and Finance Minister Roni Bar-On about his plan weeks ago and met with them again yesterday morning. Both support the concept. Bar-On applauded the plan especially in light of the dollar's feebleness against the shekel.
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"After a thorough examination conducted over months, the Bank decided to increase (Israel's) foreign currency reserves to a level between $35 billion and $40 billion, compared with $28 billion at present," the central bank wrote.
Based on Israel's brisk economic growth in recent years and its increasing involvement in the world economy and financial system, the nation needs bigger foreign currency reserves, it added.
Though the Bank of Israel phrases matters more delicately, the time is opportune for it to increase Israel's foreign currency reserves because the dollar is so low, without compromising its monetary policy (regarding interest rates).
The weightier reserves will bolster Israel's financial strength, the central bank says, adding that it will be careful to carry out its currency acquisitions without pushing the shekel's exchange rate in undesirable directions. The Bank of Israel wants to beef up foreign currency reserves without disrupting market mechanisms in setting the exchange rate.
In that context, the central bank notes that the $25 million a day it has in mind is peanuts compared with the vastness of trade on the forex market, which is considerably more than $2 billion a day. Also, the central bank reassures us that it will revisit the policy from time to time, based on actual results in the field and changing market conditions.
Nor will the program influence the central bank's goals in any way, the bank added. Its primary goal remains to keep prices stable, and then to support the government's economic goals, mainly job creation and economic growth. The Bank of Israel also notes that its acquisition program won't be changing the way it invests Israel's foreign currency reserves.
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