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Fischer Prevails as Flug Picked to Head Bank: Israel Markets

Former Bank of Israel Gov. Stanley Fischer
Former Bank of Israel Governor Stanley Fischer had gradually reduced the interest-rate from 3.25 percent since 2011, in a bid to spur growth, and all his last four cuts surprised the market, according to Bloomberg surveys. Photographer: Jason Alden/Bloomberg

Karnit Flug, former Bank of Israel Governor Stanley Fischer’s deputy, was his choice as successor from the start. It took Prime Minister Benjamin Netanyahu a little longer to reach the same conclusion.

Twice passed over for the top job, Flug was nominated yesterday by Netanyahu in a bid to wrap up a selection process that left the central bank without a permanent chief since June. Flug’s ties with her ex-boss and track record as a caretaker suggest Israel is set for more Fischer-style monetary policy, with its emphasis on growth and restraining the shekel.

“The bond market likes Flug’s nomination, as she’s perceived as continuing Fischer’s legacy of being in favor of monetary easing to fight currency gains,” Effi Cohen, a bond trader at Tel Aviv-based Leader Capital Markets, said by phone. “Her nomination increases the likelihood for one more interest rate cut in the coming few months.”

Israeli stocks declined and bonds were unchanged, after both gained yesterday following the announcement. The yield on 4.25 percent benchmark debt maturing in March 2023 was unchanged at 3.61 percent, the lowest since May. The TA-25 equity index declined 0.1 percent to close at 1,304.15, after adding 0.7 percent yesterday.

Fischer Tribute

The shekel, whose 5.5 percent gain against the dollar this year represents one of Flug’s challenges, was little changed today. It’s been the strongest among 31 global currencies during the period, posing a threat to growth in Israel’s export-oriented economy.

Fischer said Netanyahu consulted with him several times during the selection process and he expects Flug to be an “excellent” governor. “She has the courage to deal with problems,” he told Israel’s Channel 2 television in an interview from New York.

Fischer supported her candidacy from early in the process, Finance Minister Yair Lapid said in a television interview last night.

In her first appointment as governor-designate, Flug today named Nathan Sussman, head of the central bank research department, to the monetary policy committee, succeeding Barry Topf, who will leave the bank at the end of the month. The appointment will be effective Nov. 1, the bank said in an e-mailed statement.

Summers Approach

Netanyahu named Flug, 58, three months after two other nominees withdrew during the vetting process, and nine months after Fischer announced he would leave June 30. The premier also approached former U.S. Treasury Secretary Lawrence Summers, who turned down the job, according to a person with knowledge of the appointment process, who declined to be identified because of the issue’s sensitivity.

Flug was scheduled to meet late today with a government committee reviewing her appointment, followed by Netanyahu and Lapid, the prime minister’s office said in an e-mail.

Flug has said she learned much of what she knows about monetary policy from her predecessor. As caretaker governor since Fischer left, Flug stepped up his policy of buying dollars to curb the shekel’s gains and boost exports.

The bank said this month it will buy $3.5 billion next year, up from about $2.1 billion in 2013, to counter the effect of new natural gas production. In September, it bought $600 million more than necessary for the offset.

Dovish Positions

The same month, Flug presided over an unexpected interest-rate cut, reducing the benchmark by a quarter-point to 1 percent, the lowest in almost four years. Fischer had gradually reduced the rate from 3.25 percent since 2011 in a bid to spur growth, and all his last four cuts surprised the market, according to Bloomberg surveys.

Israel’s inflation rate of 1.3 percent, below the midpoint of the Bank of Israel’s 1 percent to 3 percent target, leaves room for lower rates. The bank expects economic growth to slow to 3.4 percent in 2014 from 3.6 percent this year.

“Flug will continue the policies of Fischer and will be dovish in her positions,” said Ronen Matmon, the investment chief at Excellence Nessuah Gemel and Pension Ltd., which manages 20 billion shekels ($5.7 billion) for clients. “Chances are we will see another rate cut before the end of the year, and that will benefit the stock and bond markets.”

‘Embarrassing’ Process

Netanyahu and Lapid said in a joint statement yesterday that they were impressed with Flug’s performance as acting head. She held the post while first former Governor Jacob Frenkel, and then Bank Hapoalim chief economist Leo Leiderman, withdrew their candidacies during vetting.

Lapid had said on Oct. 15 that Flug wasn’t a candidate, as attention focused on three other contenders.

“I think it’s embarrassing and wasn’t necessary,” former Governor David Klein said of the drawn-out selection process. He told Army Radio that Flug, who served as his research director, was a fitting candidate.

Born in Warsaw, Flug moved to Israel at the age of three. She completed bachelor’s and master’s degrees from The Hebrew University, and a doctorate at Columbia University in New York. Flug headed the Bank of Israel’s research department for a decade before Fischer appointed her as his deputy in 2011.

She’s the latest woman to be handed the helm of a central bank. Federal Reserve Vice Chairman Janet Yellen has been nominated to replace Ben S. Bernanke as the U.S. central banker, and Elvira Nabiullina was appointed to lead Russia’s central bank in June. Israel was one of the first countries to be led by a woman when Golda Meir was prime minister in the 1960s and 70s.

Lends Continuity

The Bank of Israel job opened in January after Fischer, 70, announced he would leave midway through his second five-year term. He has been credited with helping Israel to weather the global economic crisis better than most developed countries.

“Flug should have been chosen at the outset in light of her experience and the support for her nomination from former Governor Stanley Fischer,” said Rafael Gozlan, chief economist at I.B.I. - Israel Brokerage & Investments Ltd. “Choosing her will avoid shocks in both the Bank of Israel itself and in monetary policy.”

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