Frenkel to Replace Fischer in Return to Bank of Israel

Jacob Frenkel, chairman of JPMorgan Chase International, will return to head the Bank of Israel, replacing Stanley Fischer in the governor’s job he left 13 years ago.

Supporters, including Finance Minister Yair Lapid, said Frenkel is an “excellent” choice because he has the right experience to stabilize Israel’s slowing economy. Critics asked whether the 70-year-old Frenkel, who defied a public outcry in his first tenure over the high interest rates he imposed, was the right appointment at this time, given public demands for greater economic equality.

“In his first term as Bank of Israel governor, Frenkel was regarded as anti-social welfare and representative of the most conservative form of capitalism,” Shmuel Slavin, who served as Finance Ministry director-general during Frenkel’s first term as governor, wrote in today’s Maariv daily.

The shekel was little changed after the appointment. The currency traded at 3.6370 per U.S. dollar as of 6:13 p.m. in Tel Aviv, compared with 3.6412 the previous trading day, according to data compiled by Bloomberg. The yield on the 4.25 percent benchmark 2023 bond gained 5 basis points to 3.93 percent at the close in Tel Aviv.

Frenkel’s appointment by Prime Minister Benjamin Netanyahu and Lapid was announced in a statement last night and must be ratified by the Cabinet. The post of governor unexpectedly opened in January when Fischer, 69, announced he would leave at the end of June, midway through his second, five-year term.

Surprise Choice

The choice of Frenkel, who served as governor from 1991 to 2000, took bank-watchers by surprise. Israeli media had reported that the prime minister was casting abroad for an internationally known economist. Frenkel’s name never came up.

“In Netanyahu’s mind, he thinks the fact that someone who is internationally well known is a prerequisite, someone who can represent Israel internationally,” Jonathan Katz, an economist at HSBC Holdings Plc in Tel Aviv, said in a telephone interview.

Passed over was Deputy Governor Karnit Flug, whom Fischer earlier said was qualified to succeed him.

Frenkel returns to a central bank that operates differently and is grappling with problems other than the inflation that was his top priority in his first tenure. Inflation is low and growth has slowed. In addition, Fischer shifted responsibility for the monthly interest-rate decision from the governor alone - - a prerogative Frenkel enjoyed -- to a six-member monetary policy committee.

Turned to Business

Before joining JPMorgan, Frenkel was vice chairman of New York-based insurer American International Group Inc. and chairman of Merrill Lynch International. All along, he has built contacts as central bank governor, an economics professor at the University of Chicago and research director at the International Monetary Fund.

Frenkel studied economics at the Hebrew University of Jerusalem in the 1960s, polishing diamonds during the day to finance his studies. He earned a master’s degree and PhD in economics at the University of Chicago.

Fischer praised Frenkel after he left the bank for helping the Israeli economy to grow amid measures to curb inflation and stabilize the shekel. During his tenure, inflation was as high as 18 percent, and by the time he left the bank, it was tamed to around 1 percent. To achieve that, he set interest rates as high as 24 percent.

“It took economic expertise, political skill and courage to succeed, and he has earned the esteem in which he is held in the international community,” Fischer said in a 2001 interview.

Slowing Growth

Frenkel said today that the Israeli economy has “huge” potential and that he would use the experience he has amassed to help propel it forward.

“We have a strong economy,” Frenkel told reporters in parliament, in his first comments since his appointment. “We have an economy that weathered many crises, not because we are on the good side of the ocean, but because responsible policy was employed.”

In an interview in January, Frenkel said his main challenge during his first go-round as governor was to reduce inflation.

“We had significant engines of economic growth triggered by a very large influx of immigrants, primarily from the Soviet Union, an extraordinary boom of the high-technology revolution and encouraging developments in the geopolitical sphere,” Frenkel said. “Today, inflation has been arrested and the global economy is very sluggish. Now the main challenge is to secure sustainable economic growth.”

Inflation Low

Inflation since Frenkel’s time has remained, for the most part, within or below the government’s target band of 1 percent to 3 percent. At the same time, domestic growth is slowing, the shekel is strengthening, global demand is sluggish and housing prices are rising. Including a boost from new natural gas production, the Israeli economy will expand 3.8 percent in 2013 and 3.2 percent next year, the central bank said today. It grew 3.2 percent in 2012.

Fischer, who led the bank’s monetary policy decision for the last time today, held the benchmark rate at 1.25 percent, after cutting twice last month. The panel cited as one reason the Fed’s signal that it would halt quantitative easing.

The Bank of Israel last month cut the benchmark by a cumulative 0.5 percentage point in a bid to moderate the strengthening of the shekel, and announced it would buy $2.1 billion in foreign currency by year’s end.

“Frenkel second-generation is entering the job at the height of the global currency war, and it will be interesting to see how he manages in a repeat scenario of a strengthening dollar,” said Yaniv Pagot, chief strategist at Ayalon Group Ltd. “Another challenge for Frenkel will be to help the government take the air out of the housing market and prevent damage to the financial system.”

Fischer, a former No. 2 at the International Monetary Fund, said he was stepping down for personal reasons, mostly because his family is in the U.S. and he has achieved many of the goals he wanted to accomplish.

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