Bank of Israel Governor Karnit Flug voiced openness on Friday to reducing interest rates further or using other unconventional policy tools to boost inflation back to the target range.
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In an interview with Reuters television, she also said she was more comfortable with the exchange rate than before the Israeli currency's recent depreciation against a broadly strengthening dollar, and was not considering putting a floor on the dollar/shekel rate at this time.
Asked if the bank's reference rate, currently at 0.25 percent, could go further to zero, she said: "As we've seen in other countries, the experience is that interest rates can go lower, and there are other tools that central banks have been using, once you reach the zero bound, so there are quite a lot of policy tools in the tool kit."
She declined to specify whether this included so-called quantitative easing, or bond buying, that the U.S. Federal Reserve has used.
"There are different tools, but I think that would not be the right moment to actually specify the tools. We will be following the developments and adjust our policies accordingly."
She was speaking during the annual meetings of the International Monetary Fund and World Bank.
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Flug said she had no specific target for the foreign exchange rate. Countries like Switzerland and the Czech Republic which adopted an exchange rate floor faced different circumstances than Israel, she added.
"And I think in extreme circumstances you may consider all kinds of policies; I think right now the more flexible policies that we have been using are working, so that's where we are right now," she elaborated.
The Bank of Israel on Tuesday bought $300 million of foreign exchange, surprising some since it had not bought any in September and since the shekel had depreciated 8 percent since July.
Asked why, she said: "We have committed ourselves to offset the effects of natural gas on the exchange rate and we've been doing that over the year roughly in equal monthly amounts, and that's part of our plan. Our commitment is annual, and we've been doing that."
Asked if the purchases were to boost inflation, Flug said "both our exchange rate policy and our interest rate policy are aimed at inflation and supporting growth."
She said there had been some slowing of growth related to global economic developments and also to the effects of the violence around Gaza.
She was moderately critical of government plans to boost its budget deficit for 2015, saying it was "maybe a little bit more than we hoped for" though there was some fiscal room. But she took comfort in plans to reduce the deficit to 2.75 percent of gross domestic product in 2016, which would allow a reduction in the debt burden.
Flug justified her projection of 3 percent economic growth for 2015 by saying the latest projections were for a 5 percent increase in global trade, which would help exports, and consumption should rebound after the Gaza violence.
(Reporting by Randall Palmer; Editing by Andrea Ricci)