June 6, 2018 / 1:35 PM / 18 days ago

Israel central bank may invest some FX reserves in real estate

JERUSALEM, June 6 (Reuters) - The Bank of Israel is mulling expanding its foreign currency reserves investment portfolio to include non-tradable assets such as global real estate, a senior central bank official said on Wednesday.

“It will take a few more years until that happens,” Andrew Abir, head of the central bank’s markets operations department, which manages the reserves, told a conference.

Israel’s reserves have soared to $115 billion over the last decade, mainly because of central bank buying of foreign currency to try to contain the shekel’s strength.

“In the past, when the foreign exchange reserves stood at just $30 billion, liquidity was most important to us,” said Abir, who is also a voting member of the monetary policy committee. “Now, when we manage a significantly higher amount, yield is more important and that is what we have been emphasising the past few years.”

In 2017, the central bank made a return of 3 percent on its reserves portfolio, mainly due to a boost in the allocation of equities last year to 13.3 percent from 10 percent in 2016.

That helped counterbalance low or negative yields on European government bonds, in which one-third of the reserves are invested.

Abir, who has said the central bank aims to not lose more than 4 percent a year on the reserves, said diversifying the investment portfolio helps limit losses in case of a bad year in one segment.

“Foreign exchange reserves are like the economy’s emergency financial warehouse. You do not want to open the emergency storeroom and find out that you do not have enough ammunition,” Abir said on Wednesday. “Today, we feel much more comfortable.”

Abir defended the central bank’s intervention policy of the past decade, saying it is another monetary policy tool and more appropriate than other instruments to achieve the Bank of Israel’s inflation target of 1 to 3 percent a year.

He added that in late 2017 and early 2018 the bank needed to buy foreign currency to counter speculative activity. (Reporting by Steven Scheer Editing by Catherine Evans)

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