Central Banker Behind Israel Intervention Plan Turns Against It


by David Wainer

The man who helped design the Bank of Israel’s foreign-currency intervention program with then-Governor Stanley Fischer is now turning against it. 

Barry Topf, former director of market operations, says the purchases that initially helped Israel weather the global financial crisis may now be hurting the economy by distorting prices. It’s time for the central bank, which has tripled its reserves in less than a decade, to scale back the program significantly, he said.

 “The intervention is basically providing subsidies for exports,” said Topf, a former member of the bank’s monetary policy committee who retired in 2013. “I think an exchange rate policy which was intended for the short term and was never meant to be a permanent pillar of policy should be re-examined.”

In common with counterparts including Switzerland and the Czech Republic, Israeli central bank intervention to stem currency gains have swelled reserves, which surged to almost $100 billion in 2016 from less than $30 billion eight years earlier. The shekel has appreciated 39 percent against the dollar since 2008 and is now trading near a record high against a basket of currencies, hurting exports that contribute about one-third of gross domestic product.

Extraordinary Times

The Bank of Israel defended its policy, saying it operates in a world where major trading partners are still undertaking “extraordinary monetary policy” such as quantitative easing and negative rates.

“Needless to say that when this policy began, in 2009, not many had forecast that extraordinary monetary policy would still be undertaken by major central banks in 2017,” it said in e-mailed comments.

Topf favors a gradual phase-out of the program, and said the central bank should continue to buy foreign currencies when speculative trading causes the shekel to veer from a fair exchange rate. Long-term intervention of this scale, however, gives undesirable incentives to invest in industries that might not survive under a stronger currency, he said.

Reserves are approaching the $110 billion upper range of adequate reserves the bank set for itself. Since July, reserves have grown by just $1 billion, after rising $7 billion in the first six months of 2016.

Falling Prices

BOI Governor Karnit Flug, however, said in December that intervention in the foreign currency market isn’t limited by the self-imposed ceiling on reserves because intervention is also a tool to boost consumer prices that have been falling for two years. And while the central bank hasn’t explained why its purchases have slowed down, officials there say a few months’ trend can’t be seen as a change in policy.

Topf said policy makers would do well to stop signaling their plan to keep money loose for some time. Instead, they should push the government to stimulate the economy through worker training, reduced regulation and measures to promote productivity, he said. The central bank has kept its benchmark interest rate at a record low of 0.1 percent since March 2015.

“One of the things they have to do is clarify that monetary policy has come close to running its course and that the government has to be more proactive in solving these problems,” he said. “There’s too much of a burden on monetary policy.”

If the central bank does want to continue using unconventional tools, it could examine other options, such as buying bonds or extending credit to exporters, he said.

“That fell out of favor with the whole movement toward market solutions,” Topf said. “But these ideas should be examined and compared to the current situation of industrial subsidies.”


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