Two Major Changes Approved in Israel’s Monetary Policy

The Cabinet approved two major changes in monetary policy today, both aimed at strengthening the marketability of Israel’s exports. The most far-reaching decision was to link the Israel Pound to a “basket” of foreign currencies instead of solely to the U.S. dollar as heretofore. The Cabinet also accelerated the so-called “creeping devaluation.” The Pound was devalued by another two percent, effective at midnight Sunday and will stand at IL 8.12 to $1.

The linkage change was long advocated by the Governor of the Bank of Israel, Moshe Zanbar, but the government had hesitated for some time to break the dollar linkage. Under the system approved at today’s Cabinet meeting, the Pound will be linked to a composite unit related to the value of the currencies of the principal nations trading with Israel. The U.S. dollar will account for only 30-40 percent of the linkage; 20-30 percent will be linked to the Pound Sterling and the rest to the West German Mark, the Swiss Franc and the Dutch Guilder.

BASIS FOR NEW DEPRECIATION

The change was made because the strength of the dollar in relation to the European currencies nullified the effects Israel was trying to obtain by regularly depreciating its Pound relative to the dollar. When Israel devalued the Pound by two percent and the dollar increased in value by a similar rate, the actual devaluation in the European market was close to zero and the aim of improving the competitive strength of Israeli exports was frustrated.

The value of the new system is that the exchange rates will now reflect the fluctuations in a variety of currencies. When the dollar is down, other currencies appreciate in value; when the dollar rises, it is neutralized by the depreciation of other currencies to which the Israel Pound will be linked.

“Creeping devaluation” was adopted by the government in June, 1975. A three-member ministerial committee was empowered to devalue the Pound by up to two-percent every 30 days without the need for Cabinet approval. The ministerial committee will now be empowered to devalue the Pound by two percent as frequently as it deems necessary, though not in excess of eight percent in any four-month period.

NEXT STORY