Bank of Israel to halt forex purchases program to offset natural gas production

The Bank of Israel said on Monday that as of 2019 it plans to halt a foreign exchange purchasing program set up in 2013, to offset the effects of the production of natural gas in Israel on the local exchange rate.

In a statement, the central bank said that because a sovereign wealth fund is expected to begin operations in 2019, and is expected to begin investing money abroad in 2020, the central bank’s monetary committee has decided to end the program and no longer purchase pre-determined amounts of foreign exchange.

As the Tamar natural gas field started producing natural gas for the Israeli market in 2013, and against the background of sharp appreciation of the shekel after the nation cut back on the import of energy resources, the Monetary Committee of the Bank of Israel decided to begin a foreign exchange purchasing program that was intended to offset the effect of natural gas production on the exchange rate.

At that time, the committee said the program would be re-examined once the sovereign wealth fund, “the Fund for Israel’s Citizens” — originally scheduled to begin operating during 2018 — would be established.

Since then, each year, the Bank of Israel announced in advance what amount of foreign exchange it would purchase during the year as part of this program. To date the central bank has acquired some $13.5 billion as part of the program, according to data provided by the bank.

The central bank’s policy of intervening in the foreign exchange market has come under pressure, with critics calling for a scaling back of its interventions, as it helps distort prices, the said.

Even so, the central bank said in its statement on Monday that it will continue to buy foreign currency when the exchange rate fluctuations are unusual.

“Activity in the foreign exchange market is an important part of the monetary tools the Bank of Israel holds, and the Bank will therefore continue to operate in the foreign exchange market in cases of exchange rate fluctuations which are not in line with fundamental economic conditions, or when conditions in the foreign exchange market are disorderly,” the statement said.

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