Karnit Flug had big shoes to fill when she succeeded Stanley Fischer as Bank of Israel governor, over four years ago. But as she readies to wind up her term next week, her performance has been widely praised.
Although she had at best cordial relations with the government — and a few episodes of outright friction with Moshe Kahon, who has been finance minister for most of her time in office —Flug presided over an era of stability and prosperity for the Israeli economy.
Interest rates, the bank’s main policy tool, remained unchanged at record lows for most of her tenure as Israel enjoyed strong economic growth, near-zero inflation and record-low unemployment.
Asked in an interview with TheMarker Wednesday about the apparent lack of challenges, she smiled and said: “Management of monetary policy made it possible for the economy to be in such good shape. It didn’t happen by itself.”
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There was a time in 2015 that the bank weighed taking what Flug called “unconventional measures,” including the unprecedented option of negative interest rates, as many other central banks were doing at the time. In the end the Bank of Israel decided against it even though the shekel was strengthening, hurting exporters.
“We weren’t tempted to take exceptional measures simply due to stories in the newspaper or all kinds of ideas suggested by investment houses,” she said.
For all the self-confidence she projects now, she did not have an easy path to the top spot. Fischer was a world-renowned economist who had the full backing of Prime Minister Benjamin Netanyahu. Flug, by contrast, had spent her entire career at the Bank of Israel, out of the spotlight.
She had to watch as Netanyahu pursued a slew of other candidates for the governor’s job, only to be asked to take it after they all dropped out for various reasons. She came to be known as the “governor Netanyahu didn’t want.”
In office, she clashed with Kahlon over banking reform, the finance minister’s flagship housing program Mahir Lemishtaken and his policy of tax cuts. At the most bitter moment, a Kahlon adviser warned that Flug would never be nominated for a second term — a threat she dismissed this week.
“Why is the working assumption that I really wanted another term? I’m really not sure about it, but I hope there was no attempt here to send a message to the candidates for governor that they must align with the positions of the government, or else ...” she said.
Asked if she felt Kahlon was unwilling to make difficult decisions and prone to caving in to powerful interest groups, Flug praised him for deciding against another round of popular tax cuts this year.
“I do not want to say this in a sweeping way but, for example, the decision not to reduce taxes in the end, even though he made declarations about it, turned out to be a good one,” she said.
The controversies were mainly over policy particulars and the Bank of Israel’s stands annoyed the finance minister only because of its legally mandated role as an economic adviser to the government, Flug noted.
“In practice, it’s impossible to advise the government quietly. At a very early stage in my term, I participated in cabinet meetings and expressed my opinion on a subject,” she recalled. “On my way back from the Prime Minister’s Office to the Bank of Israel, a journey of a few dozen meters, I would debate whether I should make public what I said in the cabinet. But even before I arrived, whatever I said had already appeared online — with a certain imprecision.”
As to her successor, Amir Yaron, an Israeli-born professor at the University of Pennsylvania who has lived in the United States for two decades, Flug said she had had little contract with him so far. What would she advise him to focus on?
“The economy’s resilience must be improved by many measures, because no one knows where the next crisis will come from,” she said. “To a large extent, what helped Israel in the  crisis was strong and conservative banks, and the government debt, the long-term decline of which gave the government room to raise the deficit without the markets being moved.”
Flug, 63, has long said Israel can’t afford to let women retire at 62 and promised to set an example. Although she hasn’t yet found a new job, she plans to go on working — but not in banking.
“I’ll find a place to work. I haven’t decided on anything, but I don’t think that you will need to write in the future in my context about the revolving door between the banks and the Bank of Israel.”