Why Is the Government Trying to Weaken the Shekel and Boost Inflation?

A man puts Israeli shekel money bag on the scales opposite to the dollar. Investments in foreign currency bonds. Protecting savings from inflation. Exchange rate, comparison of economic indicators.

The COVID-19 pandemic has impacted everyone. Governments are trying to figure out how to protect their citizens and contain the spread of the virus, that’s public health crisis has contributed to other issues as well. One of the major problems that have arisen as a result of this pandemic is a serious economic crisis. No country has been left unscathed and Israel has felt the sting as well. As numerous countries have tried to close their borders, this is disrupted global supply chains, leading many businesses to have issues keeping up with the demands of their customers. Furthermore, shelter-in-place orders have dried up nearly all sources of revenue, causing some of the biggest companies in the world to file for bankruptcy. In the midst of all of this, it appears that the government of Israel is trying to intentionally weekend the shekel, leading to inflation. Why is this the case?

Evidence from the Central Bank of Israel

There are numerous financial experts for pointing to evidence that is coming out of the Central Bank of Israel. It appears that this bank is trying to make a stand against further appreciation of the shekel. Recently, despite struggles in Israel, the shekel is trading at its best rate against the dollar in nearly 30 months. While this might sound like a good thing, Israel’s Central Bank is actually trying to prevent further appreciation from taking place. Even though the Central Bank appears unlikely to push interest rates to zero or below that, there is evidence that the bank is trying to intentionally weaken the shekel.

Why Weaken the Shekel?

There are a few reasons why the Central Bank might want to intentionally weaken its own currency. The biggest reason is that a weaker domestic currency could make a country’s exports more competitive in the global environment. Furthermore, a weak domestic currency could also make imports more expensive. This has to do with the direction in which currencies are exchanged when it comes to imports and exports. If a country’s domestic currency is weaker, then its own goods are going to be cheaper to purchase. This could be an effort to prop up some of the businesses in the country on the global stage, expediting the recovery process. Furthermore, if imports are more expensive, than this encourages a country’s own citizens to buy domestic products instead of international imports.

A Lack of Room to Maneuver

It is important to note that the pandemic is only one of the issues that the Central Bank of Israel is trying to navigate right now. There is a lot of uncertainty regarding the country’s own government as well as international relations with its neighbors. As a result, uncertainty regarding political and fiscal issues could mean that currency interventions might be the only path of the central bank. Right now, the Central Bank of Israel does not have much other policy room to maneuver.

A Major Political Crisis Has Recently Ended

Speaking of political tensions, the biggest issue to unfold in Israel’s recent history involved a coalition crisis that threatened to bring down the government to Prime Minister Benjamin Netanyahu. Prior to the agreement, there was a lot of uncertainty regarding the future of Israel. Fortunately, Netanyahu and his main partner have agreed to a proposed compromise that brought the crisis to an end. At the same time, Netanyahu and the Coalition were unable to agree on a strong fiscal plan or an extension of the deadline. As a result, there are significant concerns over what the economic future of Israel is going to be. This led to significant destabilization of the shekel which the central bank had to fix.

The Role of the Virus

Finally, the virus is also playing a major role in the future of the economy of Israel. Recently, policymakers announced plans to purchase corporate bonds for the first time ever in an effort to stabilize the contraction that is taking place in the economy of Israel. Even though the economy is doing better than some estimates, the Bank of Israel still sees negative growth in the future of the country. The only question is how much negative growth is going to take place. This is largely going to depend on the course of the pandemic. Even though the country has been billions of dollars intervening in foreign exchange markets, there are still a lot of question marks around the economy. As a result, it is important for everyone to follow the advice of global health experts. The surest way to bring this crisis to an end is to control the virus and get the economy back on track.

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