JERUSALEM, Nov 9 (Reuters) - Measures taken by the Bank of Israel since the start of the Gaza war last month have stabilized financial markets without the need for lower interest rates, central bank Governor Amir Yaron said on Thursday.
Speaking on a panel at an International Monetary Fund research conference in Washington, Yaron said Israel's economy is "strong and stable" with "robust and healthy economic foundations" that will allow the country to recover quickly and return to prosperity.
At the outset of war that began on Oct. 7 when militants from the Islamist Palestinian group Hamas rampaged through towns in southern Israel, the central bank moved to defend the shekel through a $30 billion programme to sell foreign currency and provided liquidity through swap operations.
It also enacted a plan with commercial banks and credit card companies for those affected by the war to defer interest on loans.
"This array of policy steps that were taken by the Bank of Israel in the last month reveals the sufficient and necessary independence that the bank enjoys, and that it has an adequate set of monetary tools that can ensure financial stability," Yaron said.
"Avoiding a reduction in the rates is in line with operating in the FX market to moderate large depreciation fluctuations," he said, adding that steps taken by banks were "in practice, some monetary easing," targeted at those who need it most, without raising the risk premia in financial markets.
Markets were initially stunned by the Hamas attacks, which Israel says killed 1,400 people and saw more than 240 others taken hostage. The shekel tumbled 5% and reached an 11-year low, pushing its 2023 losses to 15%. Share prices sank and bond yields jumped.
But markets have reversed in November, with the shekel and bond yields returning to pre-war levels and stocks coming off their lows. At the same time, the cost of insuring Israel's government debt against default slid to its lowest level since Oct. 12.
"One month in, we can cautiously say that the policy mix we applied contributed to the stability not only of the FX market, but also had positive spillovers for the stability of local financial markets," Yaron said.
He also said that while fiscal policy is crucial for the ability of the Israeli economy to overcome the crisis and resume growth, the government needs to balance "supporting the economy and maintaining a sound fiscal position."
Israeli Prime Minister Benjamin Netanyahu has vowed to "open the taps" to help those impacted by the war, including financing the military and compensating populations on the border and families of victims and hostages taken by Hamas.
"I have no doubt that, as always, Israel will prevail and has the right ingredients to spring back to its great economic potential," Yaron said. (Reporting by Steven Scheer; Editing by Paul Simao)
