02.11.2010
 
Barry Topf, Director of the Bank of Israel Market Operations Department, today addressed the Knesset Finance Committee
 
His main points were:
The Bank of Israel's policy regarding the purchase of foreign currency
The Bank's policy since August 2009 has been to act in the foreign currency market in the event of unusual movements in the exchange rate which are inconsistent with the underlying economic conditions. From March 2008 to August 2009 the Bank implemented a program of increasing the country's foreign exchange reserves by purchasing fixed known quantities of foreign currency.
Since March 2008 the Bank has bought some $41 billion, so that the current reserves are close to $70 billion. This policy was one of the ways in which the Bank responded to the worst international crisis in seventy years.
A few years ago, after considerable analysis, the Bank of Israel reached the conclusion that Israel's foreign currency reserves were insufficient relative to the potential needs they might have to satisfy. This was stated as early as in 2004, in the Department's Annual Report, and was repeated every year thereafter. The fact is that until 2008 Israel's reserves were below the level accepted world wide as the norm.
Today, as a result of the crisis, assessments of the level of foreign currency reserves that different countries should hold are being increased significantly. In the case of Israel, our specific circumstances which require us to hold sufficient reserves at all times, must be taken into account.
Beyond the necessary adjustment of the level of the reserves, the foreign currency purchases also helped to prevent over-appreciation of the shekel and excess volatility of the exchange rate, and all the harm that they could have caused.
What did we achieve?
  A reasonable level of reserves relative to the economy's needs, that strengthen financial stability and economic resilience, and enhances Israel's international financial standing.
  An exchange rate that reduced the negative impact of the global crisis and boosted the economy's ability to recover quickly.
We have come through a severe global crisis relatively unscathed.
That means more growth, more employment, less unemployment, and maintaining exports as the engine of economic growth. We are of the opinion that the Bank of Israel foreign currency policy since 2008 made a significant contribution to the economy and to the fact that the economy has so far dealt successfully with a crisis that has not yet entirely passed.
The benefits and cost of the policy
When the Bank decides on its policy, it takes into account both potential benefits as well as possible costs. The most important point is, however, that the Bank is not a profit seeking institution. It operates to achieve the goals which the law sets for it: price stability, support for economic objectives such as growth, employment, and narrowing of gaps, and support for financial stability.
In financial terms, central banks' policies sometimes bear a cost, and sometimes yield a profit. In the Bank of Israel, management of the reserves till today has been profitable, and even in the current difficult conditions, the management of the reserves has been profitable. Offsetting the income from the reserves, there are costs associated with the management of monetary policy. In 2009 the Bank of Israel showed a profit of NIS 1,360 million––a yield of 3.6 percent in shekel terms. Sometimes, however, there will be losses in shekel terms.
The financial profit from and costs of the Bank's management of monetary policy and of the reserves are clearly stated in its financial statements. It should be borne in mind, however, that the economic achievements and gains of the whole economy resulting from the Bank's policy are not recorded to the Bank's credit and do not appear in its financial statements. When the Bank of Israel slows down excess appreciation of the shekel, or prevents abnormal volatility of the exchange rate, it is contributing to the success of the economy, to economic growth, reduced unemployment, and increased employment. When the Bank holds the appropriate amount of foreign currency reserves, the whole country enjoys the benefits of economic strength, improved financial stability, protection against unexpected events, and reduced economic vulnerability to various crises.
We believe that the Bank of Israel's general policy, and its foreign currency policy in particular, have made a significant contribution the Israel's recent economic success.