This week the International Monetary Fund (IMF) urged Israel to phase out an unconventional monetary policy – by which it intended the Bank of Israel’s habit of intervening in the country’s forex market.

Actually, the Bank of Israel had ceased this activity during a two-month hiatus but just began again by buying between $100 million to $200 million. By mid-day the buying pulled the dollar’s exchange rate from NIS 3.77 to NIS 3.80.

Market sources said that the central bank’s move was designed to “soak up a surplus supply of foreign currency” which had caused a sharp appreciation in the “basket of currencies.”
The IMF also called on Jerusalem to put together a plan which would sharply reduce Israel’s high public debt burden.

Recent increases in short-term interest rates, in both August and December, were “appropriate” to prevent an uptick of inflation as the economy recovers from recession; and Israel applauds herself on her handling of the fiscal disaster.

However the IMF urged the central bank to stop intervening in the foreign exchange market and to restore the shekel’s status as a free-floating currency.

Regarding Israel’s debt, the IMF recommends that the country reduce its ratio of debt to gross domestic product, to 70% by the middle of the next decade, and aspire to a ceiling of 60% by 2020. It is expected that the ratio will “edge up” to 80% by the end of 2010.