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Governor Fiasco Hasn’t Hurt Bank of Israel, Policy Maker Says

Photographer: Sason Tiram/Bank of Israel via Bloomberg

Karnit Flug, deputy governor of the Bank of Israel, is keeping the bank “running smoothly,” said Reuben Gronau, a retired Hebrew University economics professor and one of three external members of the six-person monetary policy committee. Close

Karnit Flug, deputy governor of the Bank of Israel, is keeping the bank “running... Read More

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Photographer: Sason Tiram/Bank of Israel via Bloomberg

Karnit Flug, deputy governor of the Bank of Israel, is keeping the bank “running smoothly,” said Reuben Gronau, a retired Hebrew University economics professor and one of three external members of the six-person monetary policy committee.

The bungled appointment of the Bank of Israel’s next governor has not affected the central bank’s operations, a member of its monetary policy panel said, offering reassurance to markets the vital institution is in good hands.

Last week, not one but two nominees fielded by Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid withdrew after questions about alleged conduct arose. That’s left the bank without a successor to former Governor Stanley Fischer six months after he gave notice and five weeks after he stepped down. Helming it in the meantime is the hand-picked deputy Fischer recommended to replace him, twice-spurned acting Governor Karnit Flug.

“The Bank of Israel is functioning normally,” policy maker Reuben Gronau said yesterday. “There are some uncertainties involved. But all the daily work is done as it used to be a week ago or two weeks ago before we started this game of guessing who the governor is going to be.”

Netanyahu and Lapid waited until days before Fischer’s June 30 departure before appointing the first of their nominees, former Governor Jacob Frenkel. He announced last week that he no longer wanted the job, saying he had suffered an “avalanche of abuse” after his nomination. Candidate No. 2, Bank Hapoalim Ltd. (POLI) chief economist Leo Leiderman, pulled out Aug. 2, just two days after he was nominated. Flug, who announced she would leave the bank after being passed over twice for the job, has agreed to stay on until a new governor is installed.

‘Running Smoothly’

Flug is keeping the bank “running smoothly,” said Gronau, a retired Hebrew University economics professor and one of three external members of the six-person monetary policy committee.

“Karnit stepped into the shoes of Stanley Fischer quite naturally,” he said. “She has been there in this post for 2, 2 1/2 years, so she knows how to run the bank.”

In 2010, the Bank of Israel law was amended to expand responsibility for interest rate decisions, which until that time had been made by the governor alone. That has made things easier during the current turmoil, Gronau said.

“Prior to the law, it was up to the governor to set the interest rate, so a substitute may have been uneasy in this job,” Gronau said. “Now, it’s a role of a committee to set the interest rate, so the fact that we are five rather than six doesn’t change the width of opinions which are presented around the table. The governor is one among equals.”

Debt Buying Unaffected

Local debt buying wasn’t affected yesterday by Leiderman’s abrupt withdrawal over the weekend.

The debt market is “tracking the big drop in Treasury yields over the weekend,” said Yshai Shilo, a fixed-income broker at Tel Aviv-based I.B.I.-Israel Brokerage & Investments. “For the moment there is no panic in the market as Flug is left in charge.”

The yield on Israel’s benchmark 4.25 percent bonds maturing in March 2023 fell four basis points, or 0.04 percentage point, to 3.76 percent at the close in Tel Aviv. U.S. Treasury 10-year note yields lost 11 basis points on Aug. 2 after employers added fewer workers than forecast in July.

The TA-25 benchmark stocks index closed up 0.1 percent to 1,208.94.

The cost of protecting Israeli bonds against default rose Aug. 2 to the highest level since July 15 after Leiderman stepped aside, with five-year credit-default swaps gaining 0.33 basis points to 109.66, according to prices compiled by CMA. The credit risk gained 276 basis points last week, the most since the five days ending June 21.

Knows the Job

The day-to-day operations at the bank’s divisions aren’t affected by the vacuum at the top, Gronau said. Yet while the government must thoroughly screen future candidates, it should act as quickly as possible within that constraint “so that we don’t have another embarrassment, because embarrassment hurts the morale of people,” he said.

Lapid said in remarks broadcast on Army Radio yesterday that he and Netanyahu would “conduct the process of choosing the governor slowly, deliberately and without pressure.”

Gronau said the absence of a new governor did not affect policy makers’ decision at the end of July to keep the 1.25 percent benchmark rate unchanged.

“Nobody waited for a new leader to make his decision,” Gronau said. “We felt that not changing the interest rate was the right thing to do for the month of August, and that’s how we voted.”

In a letter to central bank staff obtained by Bloomberg News yesterday, Flug said she would carry out her job “fully” and “professionally.”

“We are all obligated to continue to do our work to ensure the Bank of Israel will continue to fulfill its important tasks properly,” she said.

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net

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