Bank of Israel Governor Karnit Flug Declines a Second Term in Office

Decision comes as no surprise amid tensions with Finance Minister Moshe Kahlon over fiscal and housing policy

Bank of Israel Governor Karnit Flug.
אוהד צויגנברג

Amid tense relations with Finance Minister Moshe Kahlon, Bank of Israel Governor Karnit Flug announced on Friday she would not seek a second term when her current five-year stint ends November 12.

The announcement didn’t come as a surprise, especially after a high-profile flare-up with Kahlon last March over fiscal and housing policy. However, until now Flug had said she was undecided about whether to stay on for another five years as head of the central bank.

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Flug spoke with Prime Minister Benjamin Netanyahu on Thursday and informed him of her decision, the statement said.

“This is not the time for summing up, but I can already say that I will end my tenure with a feeling of great satisfaction, as the Bank of Israel has a marked role in the robust state and the stability displayed by Israel’s economy in recent years, as well as in the analysis and the promotion of discussion regarding the considerable challenges we will face in the coming years,” Flug said in a letter she sent the prime minister.

Netanyahu, in a one-line statement, thanked Flug for her service and contribution.

Flug’s letter to Netanyahu notably failed to mention Kahlon’s name, even though the two are Israel’s top economic policy-makers. Flug has long criticized Kahlon’s policy of lowering taxes, saying the government should devote more spending to health, education in infrastructure.

Their disagreements came to a head just over three months ago when Flug, directly and via the Bank of Israel’s annual report, warned that Kahlon’s fiscal policies would leave the economy unprepared for an economic downturn .

The central bank also warned that Kahlon’s Mechir L’Mishtaken (Buyer’s Price) program of subsidized housing – the centerpiece of his top policy goal of bringing down home prices – could cause prices in the free market to rise.

The Finance Ministry responded angrily to the critique and sources close to Kahlon warned that Flug would not be considered for a second term, although Kahlon himself never said so publicly.

“Israel’s economy is in its best position in decades thanks to steps led by the Finance Ministry headed by Moshe Kahlon for Israeli citizens and despite the conduct of the Bank of Israel,” the ministry said at the time.

Flug also had some implied criticism of Netanyahu. Although she was the preferred choice of the previous governor, Stanley Fischer, when he stepped down in 2013, Netanyahu sought to name someone else and only turned to Flug after both his two preferred candidates were forced to drop out.

In her letter released on Friday, Flug wrote: “I appeal to you, Mr. Prime Minister, with a request that you ensure that the process of selecting the governor of the Bank of Israel be managed in a way that will ensure the independence and professionalism of the Bank of Israel in the coming years as well, in relation to the management of the appointment process and in terms of the final result.”

A spokesman for Kahlon told Reuters that Kahlon and Netanyahu had yet to choose a candidate for governor and that there was no set date for selecting one. The process was supposed to have begun in March.

Reuters contributed to this report.