Bank of Israel head Karnit Flug
Bank of Israel head Karnit FlugFlash 90

The shekel remained stronger against the dollar, a day after it rose significantly following remarks by Bank of Israel head Karnit Flug that the danger facing the Israeli economy was more likely to be inflation, not deflation.

Flug also said that the Bank would probably end its policy of buying dollars to keep its value higher against the dollar. The shekel closed at NIS 3.79 against the dollar Tuesday.

The Bank announced Monday that it was keeping the prime interest rate at the same 0.5% it has been for the past few months. But in remarks by Flug on how she intends to conduct monetary policy – her first ever – the BOI chief said that she was likely to phase out the use of “unconventional tools” to depress the value of the shekel against the dollar.

That was taken by investors to try and end Israel's version of “quantitative easing,” the massive buying of dollars to keep the shekel low enough to enable exporters to successfully compete on international markets. By buying dollars, the Bank has been “sopping up” excessive supply, thus keeping the American currency from being too plentiful – and too cheap.

The danger for Israel was now more likely to be inflation, which would require a higher interest rate – which international investors prefer, since they can make more money in interest. While rates remain low, Flug said that it was possible rates would be raised if inflation were to return.

As a result, the shekel shot up as much as 2% in the minutes after Flug's speech, remaining stronger against the dollar Tuesday. Stocks and bonds fell Monday, and were lower again Tuesday.