Bank of Israel advice is critical to government policy, outgoing chief says
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Bank of Israel advice is critical to government policy, outgoing chief says

An independent body must provide policy analysis, especially when focus is on short term and longer-term risks are ignored, Karnit Flug says

Bank of Israel Governor Karnit Flug at a press conference in Jerusalem on March 28, 2018. (Hadas Parush/Flash90)
Bank of Israel Governor Karnit Flug at a press conference in Jerusalem on March 28, 2018. (Hadas Parush/Flash90)

The outgoing central bank governor said on Sunday at a farewell conference marking the end of her term that it is essential for the central bank to provide the government with “solid policy” advice, even if it at times creates friction with politicians.

“I believe that within the current political context, where policies tend, more than in the past, to focus more on short-term benefits and ignore longer-term risks and costs, it is essential that an independent, well-regarded institution provides solid policy analysis and advice, and helps explain this to the public,” Karnit Flug, the outgoing governor of the Bank of Israel, said in Jerusalem, according to a statement. “We’ve had frictions in the past and will probably have them in the future, and we should be able to withstand them.”

Prime Minister Benjamin Netanyahu last month appointed Amir Yaron, a finance professor at the University of Pennsylvania’s Wharton school of business, the next Bank of Israel governor, replacing Flug, whose five-year tenure has drawn to a close. During her tenure Flug criticized the government for its short-term policies and lack of long-term strategy. Flug’s last day in office will be November 13.

Flug said that during her tenure, friction between the central bank and the political system was “most intense” around issues related to the Bank of Israel supporting the financial stability of the country’s banks, even as Finance Minister Moshe Kahlon sought to increase competition by breaking the banks’ hold on the economy through a financial sector reform.

“The quest for enhancing competition in the provision of financial services, which we all share, led to heated debate as to the scope, the speed and the specifics of the financial sector reform. It centered around our insistence on ensuring that the reform does not undermine financial stability that was sometimes taken for granted by our partners in the design of the reform,” she said.

The role of the central bank at times is to also “provide a quiet, behind-closed-doors policy advice in some cases, and contribute to a better-informed public debate on key policy questions,” she said.

She added that Israel’s monetary policy over the past five years, under her tenure, has been a “fascinating journey,” in which the interest rate was reduced to a record 0.1%, and policies such as intervention in the foreign exchange market often generated “heated” debate.

“Now, following almost four years of keeping the interest rate at 0.1%, it seems as if the era of gradual normalization is approaching,” she said. “I can already visualize the heated debates that are likely to take place within the monetary committee as to the exact pace and path that this process will take. The committee’s challenge will be to move not too fast, so as not to choke the process of entrenchment of the inflation environment within its target range; and not too slow so as not to find themselves behind the curve. I assure you I will be watching this process closely with great interest.”

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