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Foreign Currency Market and Managing the Foreign Exchange Reserves
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Israel's Foreign Currency Market
, and Publication of Representative Exchange Rates
The Foreign Currency Department
monitors and assesses
developments in Israel's foreign currency market
and conducts the Bank's exchange-rate policy.
Foreign currency is traded
against the sheqel between the banks and their customers in Israel and abroad, and among the banks themselves in the interbank market. The current exchange rate policy is based on a free float of the sheqel vis-a`-vis other currencies, and for many years the Bank of Israel has pursued a policy of non-intervention in the foreign exchange market. However, the Bank retains the option to intervene, through the purchase or sale of foreign currency on the interbank market, should the need arise.
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On foreign currency trading days the Bank of Israel publishes the
representative exchange rate
of the NIS against foreign currencies. These representative rates are based on a sample of the exchange rates in the market at the time they are determined. In the past, the exchange-rate policy for the sheqel was set in terms of a currency basket; the currencies and their shares in the basket reflect the composition of Israel's foreign trade in goods and services. Although the currency basket plays no role in the current exchange-rate policy, the Bank of Israel still publishes a representative rate for the basket, as a statistical service to the public. Note also that although the representative exchange rate is an indicator of the rate actually prevailing in the market, it has no legal status. Parties to transactions which are indexed to foreign currency are, therefore, free to carry them out at any exchange rate they agree to between them.
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Managing the Foreign Exchange Reserves
The Foreign Currency Department also
manages Israel's foreign exchange reserves.
The functions of the reserves fall into two categories: (1) Potential uses of the reserves, i.e., the possibility of selling them (in exchange for NIS) or lending them, with the main use being the sale of foreign exchange to the government for the servicing of its debt; and (2) Benefits to the economy arising from the fact that the State of Israel possesses a
particular quantity of foreign exchange reserves,
such as reduction of the probability of a crisis in Israel's foreign exchange market and improvement of Israel's international financial standing. The functions of the reserves serve as a basis both for determining their desired size and for defining the investment policy according to which they are managed.
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Similarly to other central banks, the Bank of Israel has adopted a conservative investment policy for the reserves, which is designed to achieve three main objectives:
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Preserving the value of the reserves in terms of their uses;
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Management of the reserves at a high level of liquidity;
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Achieving a reasonable yield on the reserves portfolio, subject to the previous two principles.
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The reserves are therefore held in reserve currencies which match expected uses of the reserves and invested primarily in liquid or short-term assets. The reserves are invested, through overseas financial markets, in foreign government bonds, in deposits in foreign banks, and in other financial instruments. The Foreign Currency Department constantly monitors developments on financial markets abroad, in order to make investment decisions and determine changes in the portfolio.
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Providing Foreign Currency Banking Service to the Government
The Bank of Israel Law provides that the Bank is the government's sole fiscal agent and supplier of banking services. Therefore, the Department also provides foreign currency banking services to those government ministries which from time to time make and receive payments denominated in the currencies of various countries.
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About the Bank of Israel