Israel's foreign currency reserves of $23 billion are

de facto

being managed by dealing rooms, Bank of Israel Governor David Klein complained yesterday.

The central bank's regular operations have been disrupted by a simmering labor dispute that began in February, Klein said at the Israel Brokerage and Investment annual conference on May 16.

Not only is the dispute preventing the bank from properly managing Israel's foreign currency reserves. It is also preventing the governor from making decisions on lending rates, Klein said.

Workers involved in the industrial action are not passing along data essential for informed decisions, he explained.

The central bank implements its policy toward the foreign currency reserves through the banks' dealing rooms. In the absence of instructions from the central bank, the dealers are making decisions of their own, Klein said. They are not authorized to do so and these operations contravene the central bank's policy.

"I hope they are professional, because today we don't know how the foreign-currency reserves are being run," Klein said about the dealers.

Interests rate changes won't be published until dispute ends

"The monetary interest won't be published as long as the labor dispute at the Bank of Israel continues," Klein said at the IBI conference.

The central bank's trend has been to gradually, slowly lower interest rates on its sources. Given that the governor did not order an interest rate cut for May (albeit in the absence of data), some market players had hoped for a larger cut when a decision is belatedly passed along. For instance, if the pace is about 0.2% a month, they hoped the bank would direct a cut of 0.4% to factor in the freeze in time.

But Klein told TheMarker.com that any forthcoming interest cut will not be greater because of any delay. Any decision will look forward rather than to the past, Klein noted.

According to bank sources, the labor dispute is nearing an end. New interest rates will apparently be published in May 29.

On criticism by ministers, the public sector and the media regarding the interest rate freeze, Klein said such matters are complicated. Although many think interest rates could be cut even in the absence of essential data, they simply cannot, he clarified.

Klein said that the process involved in deciding the interest rates takes a week, and encompasses the contribution of sixty people working at four central bank divisions.

Abolish the mobility band

Klein reiterated his position that Israel should try to revamp its exchange rate regime by abolishing the mobility band. The mobility band is an illusion sold to the public, he stated, that won't hold water when it's needed the most.

The foreign-currency market is infinitely stronger than any artificial mobility band, Klein said, adding that it's better to admit that now.

Klein favors abolishing the mobility band at this time, before any crisis arises. He believes that abandoning the band will decrease speculative capital movements and stabilize the forex market.