Twice-Snubbed Flug Nominated as Bank of Israel Governor

Acting Bank of Israel Governor Karnit Flug, passed over twice for the central bank’s top job, was nominated for the post today in a bid to wrap up a bungled selection process that’s left the institution without a permanent chief since June.

Prime Minister Benjamin Netanyahu named Flug, 58, three months after two other nominees withdrew during the vetting process, and nine months after former Governor Stanley Fischer, who picked her as his deputy and deemed her a worthy successor, announced he would leave June 30.

“We were impressed with Dr. Flug’s performance as head of the Bank of Israel in the past few months, and we are sure she will continue to help us lead the Israeli economy to new achievements amid the global economic turmoil,” Netanyahu and Finance Minister Yair Lapid said in a joint e-mailed statement. The cabinet has to approve the nomination for her to become Israel’s first woman central bank chief.

The yield on the 4.25 percent benchmark bond maturing March 2023 fell 4 basis points to 3.62 percent, the lowest since May, at the close in Tel Aviv. Israel’s benchmark TA-25 stock index climbed 0.7 percent.

Flug has said she learned much of what she knows about monetary policy from Fischer. His dual focus on employment and growth alongside price stability resembled the U.S. Federal Reserve’s model and marked a shift at the Bank of Israel, where previous governors placed an emphasis on inflation.

Rate Outlook

“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.”

Flug, who has been caretaker governor since Fischer left, has continued his policy of buying dollars to weaken the shekel and boost exports, which drive Israel’s economy. The Israeli currency has rallied about 5.5 percent this year, the most among 31 major currencies tracked by Bloomberg.

The bank has said it will buy more than $2 billion this year and $3.5 billion next year to offset the effect of new natural gas production. In September, under Flug’s leadership, the bank bought $600 million more than necessary for the offset. It also cut the benchmark interest rate by a quarter-point to 1 percent, after having lowered it gradually under Fischer from 3.25 percent since 2011 in a bid to spur growth.

‘Many Challenges’

“There are many challenges ahead for the Bank of Israel and the Israeli economy,” Flug said outside the bank in Jerusalem today after her appointment was announced. “I hope that together with the excellent staff of the Bank of Israel, we will be able to make progress on them.”

After Netanyahu snubbed her for the second time in July, Flug, who has been at the bank for 25 years, had announced she would resign once a new governor was installed.

Three other candidates, including former Argentine central bank chief Mario Blejer, had been considered the only contenders until last week, when Flug’s name suddenly re-emerged. Lapid on Oct. 15 said she wasn’t a candidate.

“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.

Approval Process

Blejer, reached by phone in Brussels, said his former student at The Hebrew University of Jerusalem was an “excellent choice.”

Two previous nominees, former Governor Jacob Frenkel and Bank Hapoalim chief economist Leonardo Leiderman, withdrew during the government scrutiny process. Flug has already been vetted by a committee that reviews senior civil service appointments, before she became deputy governor, though she’ll still require the panel to sign off on the new job.

Flug holds a Columbia University doctorate and headed the Bank of Israel’s research department for a decade before Fischer appointed her as his deputy in 2011.

Born in Warsaw, Flug moved to Israel at the age of 3. She received her bachelor’s and master’s degrees at The Hebrew University before heading to Columbia, where she wrote her PhD dissertation on “Government policies in a general equilibrium model of international trade and human capital.” In her spare time, she enjoys cooking, she said in an interview last year.

Flug is 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, and Russia appointed Elvira Nabiullina in June.

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.

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