In recent years, Lunt Capital has emphasized a theme that “central banks rule financial markets.” Our Investment Trek has validated this idea. I had the opportunity to visit the Bank of Israel at their headquarters in Jerusalem. There were two clear themes emphasized: the Bank’s mandate for price stability and the independence of the central bank. This has not always been the case, as Israel battled inflation during the 1980’s. The credibility of the Bank of Israel has been an important part of creating an environment conducive for economic growth. (Side note: fear of inflation is one of the most significant impediments for economic growth. Central Banks with credibility fighting inflation are critical).
From 2005 to 2013, the Governor of the Bank of Israel was Stanley Fischer. He was the former chief economist of the World Bank. He is highly respected by financial markets, and his leadership was significant in lifting the stature of the Bank of Israel in the eyes of financial markets. Stanley Fisher is now the Vice Chairman of the U.S. Federal Reserve.
The Bank of Israel had a highly accommodative monetary policy, as it has cut rates 13 times since 2011. Its current policy rate is 0.1%. Approximately 1/3rd of Israel’s GDP comes from exports, and policy makers are concerned with a strong Shekel. On June 22nd, the Bank held steady at its current rate, but comments from Bank of Israel Governor Karnit Flug have sent the Shekel higher. While Israel has battled deflation in recent months, Governor Flug’s outlook saw a recovering in inflation and growth. Her comments seem to rule out extraordinary monetary policies such as quantitative easing. Her comments sent the Shekel to the highest levels in more than a decade. Markets now expect currency market intervention in an attempt to weaken the Shekel.
Israel is no exception. The eyes of the financial markets are fixed on the Bank of Israel.
Special thanks to Brennan Staheli, Jared Skidmore, and the Lunt Capital team for their contributions to this report.