The temptation for central banks to engage in competitive devaluation is fading as rising Treasury yields diminish the allure of assets in emerging markets, Bank of Israel Governor Stanley Fischer said.
“All those who’ve been worrying about so-called currency wars should be feeling better,” Fischer told reporters in London late yesterday. “I am happy to see these rises in Treasury yields because we’ve been dealing with capital inflows which are not particularly wanted.”
The Bank of Israel last month cut interest rates twice by a cumulative 0.5 percentage point to 1.25 percent in a bid to moderate the strengthening of the shekel, and also announced the purchase of $2.1 billion in foreign currency by the year’s end. The shekel has jumped 7 percent in the past year, the most among 13 Middle Eastern currencies tracked by Bloomberg. It traded at 3.6103 to the dollar at 1:45 p.m. in Tel Aviv.
Brazil’s Finance Minister Guido Mantega coined the term “currency war” in 2010, saying his country was the victim of rich nations that were using monetary policy to devalue their currencies and fuel exports. Rate reductions by the European Central Bank and Bank of Japan as well as Israel’s natural gas finds had strengthened the shekel to the point where it didn’t reflect economic fundamentals, Barry Topf, a senior adviser to Fischer, said in an interview May 29.
“If you have a current account which is fundamentally in balance, which ours is, then when our rates are significantly above foreign rates, we have to deal with foreign inflows,” Fischer said yesterday.
The steps taken by the central bank last month have helped bring the currency to “a new, more stable level,” though it is “not quite” at the level which the bank considers to be at equilibrium, Fischer said today in a Bloomberg Television interview.
“There is still somewhat of an appreciation of the shekel relative to where we’d expected it to be over the longer term,” Fischer said in London. “But we at least see at the moment that it is fluctuating and not moving only in one direction.”
As speculation the Federal Reserve may pare its bond-buying program known as quantitative easing mounts, yields on 10-year Treasury bonds reached 2.29 percent on June 11, the highest since April 2012 and up from a record 1.38 percent in July. JPMorgan Chase & Co.’s Emerging Markets Currency Index has fallen 4 percent in the past month as investors pull money out of developing nation bond funds.
In May 2010 Israel was reclassified as a developed market from emerging market by MSCI Inc. (MSCI:US)
Fischer, 69, announced in January he would step down at the end of June, midway through his second, five-year term. A former No. 2 at the International Monetary Fund, Fischer said he was leaving for personal reasons, mostly because his family is in the U.S. and he has achieved many of the goals he wanted to accomplish.
Prime Minister Benjamin Netanyahu hasn’t announced yet who will replace Fischer, and the central banker hasn’t said yet what his next job will be. He said yesterday that he has “no reason to think that’s a realistic question” when asked if he would like to be the next Fed chief.
“There is one mistake you must never make -- do not accept an offer that hasn’t been made to you,” Fischer said. In his interview today Fischer said he wasn’t planning to retire, though didn’t elaborate.
Fischer has been credited with helping Israel weather the global economic crisis better than most developed countries. Between 2005, when Fischer took office, and last year, the economy grew at an annual average of 4.3 percent, and per-capita growth averaged 2.5 percent, the governor said at a parliamentary finance committee meeting on June 3.
He is departing as Israel’s central bank contends with slowing growth, the strengthening shekel and sluggish global demand on the one hand, and surging housing prices on the other.
Fischer earned a reputation as a trailblazer as the first central banker to cut rates in 2008 at the start of the global economic crisis, and the first to raise rates the following year in response to signs of financial recovery. He also bought up foreign currency in unprecedented amounts to drive down the value of the shekel and boost exports, more than doubling reserves.
“I am leaving my position thinking that that outlook is optimistic,” Fischer said last night. “Israel is very successful in figuring how to solve difficult problems.”
Central Bank Changes
During his eight years in charge of the central bank, Fischer introduced a raft of changes, chief among them the shifting of responsibility for the monthly interest-rate decision from the governor alone to a six-member Monetary Committee, including three outside academics.
The Fischer-led Bank of Israel has surprised economists in about a quarter of its rate decisions, more often than any other OECD country for which comparable data is tracked by Bloomberg. Since October 2011, when the monetary committee began to operate, Fischer has only used his tie-breaking vote once, and that was in last month’s unscheduled rate cut.
Fischer, who during his two decades as a Massachusetts Institute of Technology professor helped to educate the current heads of the Fed and the ECB, has steered toward the U.S. model during his tenure at the Israeli central bank. His dual focus on employment and growth alongside price stability resembles the Fed’s and has marked a shift at the Bank of Israel, where previous governors placed an ECB-style emphasis on inflation.
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