Bank of Israel’s FX interventions reached $8.2 billion in October

The Bank of Israel (BoI) sold $8.2 billion in foreign currency reserves from October 9 until the end of the month, according to data published by the central bank on November 7.

On October 9, the BoI approved a $30 billion FX intervention programme barely 48 hours after terrorist organisation Hamas launched a set of attacks against Israel from the Gaza Strip. The attacks killed over 1,400 people, most of them civilians.

The central bank explained it will “operate in the market during the coming period in order to moderate volatility in the shekel exchange rate and to provide the necessary liquidity for the continued proper functioning of the markets”.

The central bank also announced it would provide liquidity through swap mechanisms of up to $15 billion.

The shekel depreciated in the attacks’ wake, dropping by over 2% against the US dollar on October 9. Nonetheless, the BoI’s interventions have proven effective. The shekel’s exchange rate hit the lowest point from October 25 until October 31, but by November 7 it had recovered the levels it had before the attacks.

The attacks and subsequent fall in the shekel followed a period of protracted political instability. The Israeli currency had been gradually weakening since January due to the political turmoil triggered by government plans to trim the powers of the supreme court.

Overall, the shekel had fallen by close to 13% against the dollar right before the October attacks. This has been adding inflationary pressures, putting upward pressure on import prices at a time of above-target inflation.

The central bank has enough reserves to provide support if instability resumed. At the end of last month, the reserves portfolio stood at $191.2 billion. This represents around 36.8% of Israeli GDP.

Overall, the portfolio decreased month on month by $7.3 billion in October. This was mainly due to $1.5 billion in foreign currency sales and the devaluation of foreign currency assets.

These two factors were partly offset by $2.4 billion in government transfers from abroad.

Policy outlook

In September, inflation increased year on year by 3.8%, down from 4.1%. It is unclear how the war has been affecting price increases, but most observers agree it is likely to reduce supply and foster instability in energy markets. These could boost inflation over the medium term. The central bank’s inflation target is a range between 1–3%.

Since the attacks, the BoI has held one monetary policy meeting, on October 23, when the central bank’s monetary committee kept interest rates unchanged at 4.75%. The BoI has kept the rate unchanged at 4.75% since May.

“Inflation remains above the target range, and is affected by developments with regard to the exchange rate,” said the central bank. “One-year inflation expectations and forecasts are within the target range, near the upper bound.” Nonetheless, capital markets’ expectations two years ahead are within the target range.

In the policy statement, the BoI stressed its policy is focused on stabilising financial markets and reducing uncertainty. “The interest rate path, and the use of additional monetary policy tools, will be determined in accordance with this purpose and with developments in the war, as well as with data on economic activity and the inflation dynamics,” added the statement.