Bank of Israel’s quiet move to stabilize the shekel
New disclosures highlight a more active currency stance than officially acknowledged.
Today it became clear beyond any doubt that the Bank of Israel intervened in the foreign exchange market, purchasing approximately $801 million during May in a move that increased demand for dollars and eased pressure on the shekel. The disclosure, published as part of the central bank’s monthly foreign exchange reserves report, sparked significant interest in financial markets and prompted a vigorous communications effort from the Bank of Israel.
The bank sought to control the narrative from both directions. On the one hand, it clarified in official statements and conversations with journalists that the intervention was not intended to influence the exchange rate, but was carried out in response to what it described as “irregular market activity.” Officials even pushed back against headlines and descriptions suggesting that the bank was attempting to weaken the shekel.
On the other hand, the Bank of Israel declined to provide details about the exact timing of the purchases, the approval process behind them, or the nature of the market distortions it identified.
The central bank finds itself in a difficult position. Whether the intervention was motivated by concerns over unusual market behavior or by concerns about the rapid appreciation of the shekel, it has little incentive to publicly acknowledge that exchange-rate considerations played a role. Any intervention is therefore likely to be described as a response to market dysfunction rather than an attempt to influence currency levels.
There are several reasons for this. First, Governor Prof. Amir Yaron has repeatedly stated that the Bank of Israel does not target a specific exchange rate. Second, a central bank perceived as managing its currency could attract accusations of being a “currency manipulator,” potentially creating diplomatic friction, particularly with the United States. Third, central banks generally seek to avoid becoming active participants in exchange-rate battles that can attract speculative trading. Fourth, intervention aimed explicitly at influencing the exchange rate could raise legal and procedural questions and may require additional government approvals.
For now, however, the Bank of Israel can take some satisfaction in the results. Through a series of policy moves, it has managed to halt the rapid strengthening of the shekel. The first step was the interest-rate cut on May 25. The bank then entered the foreign exchange market and purchased dollars. Finally, on June 2, Governor Yaron signaled the possibility of further rate cuts. While the language was more nuanced, the message was widely interpreted by markets as dovish. Together, these actions have helped stabilize the shekel and may continue to do so in the coming weeks.
The Bank of Israel continues to insist that it acted solely because of “irregular market activity.” Yet economists note that the pace of the shekel’s appreciation had become unusually rapid. As Alex Zabezhinsky, chief economist at Meitav, told Calcalist: “There were unusual developments. The move from 2.9 to 2.8 shekels per dollar happened extremely quickly. In the end, the bank chose to intervene, demonstrating that intervention is not taboo. I thought it would avoid doing so because of concerns about how it would be perceived internationally, but ultimately it acted.”
At the same time, Zabezhinsky believes the scale of the intervention was relatively modest and likely not the primary factor behind the stabilization of the currency. Nevertheless, he argues that the very fact that the Bank of Israel intervened sends a signal to markets and may itself help restrain further appreciation of the shekel, regardless of how the central bank describes its actions.
The Bank of Israel traditionally maintains a high degree of secrecy around foreign exchange operations and typically executes such purchases through foreign banks. However, there was an early indication that intervention had taken place. According to Jonathan Katz, chief economist at Leader Capital Markets, evidence appeared in the monetary base report published last week.
The report includes a category called “Foreign Exchange Conversions,” which reflects the amount of shekels created for the purpose of purchasing foreign currency. The category is often empty, but in May it showed NIS 2.269 billion.
Comparing that figure with the $801 million purchase disclosed today suggests that the Bank of Israel bought dollars at an average exchange rate of approximately NIS 2.83 per dollar. This indicates that the intervention likely took place during the final week of May, after the central bank’s interest-rate decision, when the dollar was trading near those levels.
