Treasury slams Bank of Israel, signals governor to leave

A Finance Ministry spokesman said the hunt for a new Bank of Israel governor would begin after Passover.

Karnit Flug at her office on February 3, 2015 (photo credit: MARC ISRAEL SELLEM)
Karnit Flug at her office on February 3, 2015
(photo credit: MARC ISRAEL SELLEM)
Finance Minister Moshe Kahlon is reportedly looking to replace the head the Bank of Israel after she blasted the Treasury in its annual report published.
Bank of Israel Gov. Karnit Flug criticized Kahlon’s affordable housing plan – “Mehir L’mishtaken” – saying that by giving grants to some developers and young couples, the program had divided local real estate into two spheres, a subsidized and a free market, driving up costs in the latter.
Over the past decade, average housing prices in Israel have more than doubled, far outpacing wage growth. In early 2018, the real estate market began to dip slightly, a trend for which Kahlon claimed credit.
A Finance Ministry spokesman said the hunt for a new Bank of Israel governor would begin after Passover, but that the job search had nothing to do with the blistering report, according to Reuters. Flug’s term ends in October.
Yet in response to the report, a Finance Ministry spokesman attacked the bank’s macroeconomic advice: “Unfortunately, the Bank of Israel continues to act in an economic policy that serves mainly its own interests,” the spokesman said.
“The Israeli economy is in a better situation than has been for a decade because of the three years of hard work by Kahlon and courageous steps taken by the Finance Ministry... all despite the conduct of the Bank of Israel.”
At a press conference on Wednesday, Flug said, “We are at the peak of a business cycle.” She noted that the country’s extreme income inequality, along with low spending on education, would likely stifle future economic growth.
Flug added that despite a strong economy and record low unemployment, Israel’s deficit grew 1.4% last year – leaving little wiggle room for stimulus spending during a recession.
Flug has served as bank governor for nearly five years, taking over after Stanley Fisher stepped down in 2013. Flug and Kahlon have battled on a number of issues, specifically on further tax cuts that add to the deficit.
“The relationship between the Treasury and the Bank of Israel has deteriorated to such a low level,” Alex Zabezhinsky, chief economist at Meitav Dash investment house, told The Jerusalem Post. “Kahlon told Flug earlier that her advice was not good. I think that in any case, he was looking for somebody else for the next term for the Bank of Israel governor.”
Zabezhinsky defended Kahlon’s affordable housing program, saying it gives young couples an opportunity to buy apartments that they otherwise could not afford.
And he characterized Flug’s tenure as relatively uneventful – given that Israel’s interest rate has remained close to zero, taking away a key policy instrument that the bank could use.
“I can say that she did not make dumb mistakes. In contrast, as governor [David] Klein in 2002, he decreased interest rates sharply by 2%, as part of the Treasury agreement to cut the budget, and it was very unsuccessful step.”
Unlike Flug, Fisher held the ear of prime ministers and the Treasury. Part of that was because Flug was not the first choice for the position, Zabezhinsky said, but was a default compromise.
In response to the media reports, the Bank of Israel’s spokesman said, “The process of appointing the next governor should not serve as a tool to harm the central bank’s independence.” The bank also criticized the Finance Ministry for trying to stifle public discussion.
Flug had pushed back earlier in an Army Radio interview, saying: “It is very important that the Bank of Israel’s status as an independent body be preserved outside the political system.”
Ultimately, the decision on whether to extend Flug’s term or appoint a new governor lies with the prime minister.