Bank of Israel chief Flug says undecided about running for second term

Governor has not yet discussed her future with MP; says chances of tax cut have dimmed

Shoshanna Solomon is The Times of Israel's Startups and Business reporter

Bank of Israel Governor Karnit Flug speaks during a press conference in Jerusalem on March 31, 2015. (Yonatan Sindel/Flash90)
Bank of Israel Governor Karnit Flug speaks during a press conference in Jerusalem on March 31, 2015. (Yonatan Sindel/Flash90)

The governor of the Bank of Israel Karnit Flug said on Tuesday she has not yet decided whether to run as a candidate for a second term as head of the nation’s central bank, in light of comments by Israel’s finance minister that the search for a new governor will start shortly.

“There are still seven months until my first term ends,” Flug said at a meeting with journalists at the Jerusalem Press Club. “I haven’t yet thought about it and I have not spoken with the Prime Minister on that possibility.”

Flug, who has been in office since 2013 and is nearing the end of a five-year term, replaced Stanley Fischer who went on to become a — now former — Federal Reserve vice chairman.

Israel’s Finance Minister Moshe Kahlon said last month that the search for a new governor will start after the Jewish holiday of Passover, Reuters reported on March 29. The Jewish holiday of Passover ended last week.

The Finance Ministry comments came after the Bank of Israel released a report that was critical of the finance minister’s flagship housing project, which subsidizes homes for qualified buyers. Flug has also clashed with Kahlon a number of times on his bid to cut taxes for citizens, saying the government should spend surplus tax revenues on infrastructure, education, and improving social services instead.

Flug said on Tuesday she did not believe the current disagreements with the Finance Ministry on policies, such as lowering taxes or the housing policies, were hampering the independence of the bank. “Tensions between the Ministry of Finance and the central bank are not unique to Israel,” she said. She added that the central bank and the ministry still work “closely” together and the central bank remains a “very independent” institution.

Finance Minister Moshe Kahlon (right) with Bank of Israel Governor Karnit Flug, June 3, 2015. (Yonatan Sindel/Flash90)

Figures released by Israel’s accountant general on Monday showed that tax receipts in the first quarter of the year were just some NIS 700 million above the forecast. These figures have dampened the prospects of a tax cuts in the near term, she said.

“My understanding is that the results for the revenues for the first quarter were only slightly above what was expected or projected at the time that budget was formed, and I think there is a broad agreement among the professional staff, also in the Ministry of Finance, that it does not provide the basis for a reduction in taxes at the moment,” she said.

Flug said that a global trade war could negatively impact the Israeli economy, which is dependent on exports. It would be “bad news for a small open economy,” like Israel’s, she said, whose “strongest growth episodes were always associated with periods where world trade expanded rapidly.”

The central bank governor also said that it was too early to say if a slower rate of house price increases in 2017 was a “trend” or just a “fluctuation” in prices.

“To a large extent it will depend on whether the effort — and there has been quite an effort — to increase the supply of new homes will continue and will bear fruits,” she said. “We have seen some slowing down in the number of new housing starts, and if it is temporary and the number of new starts will resume its increase and it will stay at a high level, I think chances are that we will see a further decline in housing prices.”

Regarding Israel’s response to a tax rate cut in the US, which could make it more attractive for businesses to set up their operations in the US, Flug said that corporate taxes in Israel have been traditionally much lower than that of the US, and that the US tax reform, promoted by US President Donald Trump, has narrowed the gap.

“Tax incentives are not the main reason why, for example, R&D centers are set up in Israel,” she said. Israel’s ecosystem in certain areas of innovation is still very attractive, she said. But if the attractiveness of Israel will be reduced by the US tax reform then “we will have to think what are the measures that we should take in order to make sure that we retain our relative attractiveness.”

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