In surprise turnaround, Karnit Flug nominated as Bank of Israel governor

Markets reacted favorably, with the TA-100 increasing .62 percent, while the yield on benchmark bonds fell to their lowest levels since late May.

Karnit Flug 370 (photo credit: REUTERS/Ronen Zvulun)
Karnit Flug 370
(photo credit: REUTERS/Ronen Zvulun)
Prime Minister Binyamin Netanyahu and Finance Minister Yair Lapid nominated Karnit Flug on Sunday to replace her former boss, Stanley Fischer, as Bank of Israel governor, after snubbing her twice for the role.
If confirmed, Flug, who has served as acting governor since Fischer stepped down in June, will be BoI’s first female governor.
“We have been impressed by Dr. Flug’s performance as acting governor in recent months, and we are certain that she will continue to assist us in moving the Israeli economy to additional achievements in the face of the global economic upheaval,” Netanyahu and Lapid said in a joint statement.
Flug thanked them for the appointment, saying she looked forward to working with BoI’s professionals and the government to meet the “significant challenges” facing the Israeli economy.
Markets reacted favorably to the news, with the TA-100 increasing .62 percent, while the yield on benchmark bonds fell to their lowest levels since late May.
Fischer praised the decision, crediting Flug with helping him make key policy decisions during his tenure.
“I know it was not an easy decision, but I also know that along the way, the prime minister and finance minister searched for the most fitting nominee for the good of Israel’s economy,” he said.
Despite Fischer’s five-month warning before stepping down, Lapid and Netanyahu did not produce their first choice for a successor until his final days in office. That nominee, former BoI governor Jacob Frenkel, rescinded the offer in July when allegations that he had stolen a garment bag from the Hong Kong airport duty-free shop in 2006 came to the fore. Frenkel denied all wrongdoing, saying the incident was a misunderstanding, and blasted the Israeli media for relentlessly hounding him over the incident.
In August, Netanyahu and Lapid’s second pick, Bank Hapoalim chief economist Leo Leiderman, changed his mind just two days after accepting the nomination, as stories of his consultations with astrologers and alleged misdeeds during his employment at Deutsche Bank emerged.
After being overlooked for the second time, Flug, who was Fischer’s favorite for the position and who had garnered the support of prominent MKs, announced that she would resign from the bank once a new governor was in place.
Since then, Netanyahu and Lapid decided to vet three candidates at a time by requesting the approval of the Turkel Committee, which deals with high-level nominations. The committee approved all three candidates – Mario Blejer, Zvi Eckstein and Victor Medina – in early September, but Lapid and Netanyahu could not agree on a final choice.
Netanyahu was reportedly persuaded to bring Flug on board after a recent phone call with Fischer.
In interviews with Channel 1 and Channel 10 Sunday night, Lapid called the elongated appointment process “shocking.”
“I don’t mind apologizing to Ms. Flug if it will make everyone feel better,” he said, in response to a statement that he made four days ago saying that Flug would not be nominated.
“I don’t think the process added honor to anybody, but the final result was the correct one. [Flug] will be an excellent governor.”
“Those who opposed Flug’s nomination pointed to her lack of international experience, arguing that it could harm Israel’s economic standing,” said Shmuel Ben-Arieh, director of local market research at Pioneer Financial.
“In my opinion, Israel’s standing was actually harmed more by Lapid’s and Netanyahu’s unimaginable zigzagging in the process of picking a governor, during which the natural choice, who was finally chosen, was in front of their faces the whole time.”
Flug’s years of experience at the bank and mentorship from Fischer will doubtless help her to navigate serious economic challenges, such as taming housing prices, navigating the still-fragile global economy, and moderating the persistent strengthening of the shekel and its effect on exporters.
“The appointment will prevent shocks at the Bank of Israel and the monetary policy,” said IBI Investment House chief economist Rafi Gozlan, who criticized the “puzzling” fourmonth period that preceded Flug’s nomination. “This is a direct extension of Fischer’s policy, though at this stage there is a greater emphasis on exports, and thus the exchange rates, as opposed to housing.”
As acting governor, Flug did not shy away from active intervention in the currency market.
Despite the expectation by some forecasters that BoI would wait until a new governor was in place before tinkering with interest rates, the monetary committee twice lowered them since Fischer’s departure.
Remaining on board at the bank also means more stability on the six-person monetary committee. With Fischer gone and committee member Barry Topf stepping down at the end of the month, Flug’s departure would have meant the turnover of all three of the bank’s representatives on the key decision-making body (the remaining three are outside academics).
Flug, who received her master’s degree in economics at the Hebrew University and her doctorate in economics at Columbia University, has worked for BoI since 1988, focusing on research related to the labor market and macroeconomic policy. She spent four years as an economist at the International Monetary Fund and two years as a senior researcher at the Inter-American Development Bank.
Flug was a member of several prominent public committees, such as the Brodet Committee on the defense budget and the Trajtenberg Committee for social and economic change.