Bank of Israel Expected to Focus More on Asset Prices Under New Chief

Economists predict the newly nominated bank governor, Amir Yaron, will be more hawkish than his predecessor, Karnit Flug

Prof. Amir Yaron
Wharton School of Business

After 25 years of mainly targeting consumer inflation, the Bank of Israel is expected to focus more on asset prices once the U.S.-based Israeli academic Amir Yaron becomes its new governor, and economists suspect he may be more hawkish than his predecessor.

Last week Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon nominated Yaron, an Israeli-born finance professor, to replace Karnit Flug when her term ends next month.

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Since the early 1990s, the central bank has largely targeted consumer inflation, which until recently was well below target. The Bank of Israel has left the benchmark interest rate at 0.1% since 2015.

Yaron, 54, who has lived in the United States for two decades, has two important attributes for Netanyahu. He is an international economist and he speaks Hebrew. The prime minister has stressed the need for an expert on the global economy in the job.

Some Israeli economists have criticized the nomination, which still needs various vetting and cabinet approvals, saying Yaron lacks monetary policy-making and managerial experience.

“Netanyahu and Kahlon are taking something of a gamble in regard to the next governor’s ability to handle potential crises,” said Rafael Gozlan, chief economist at IBI Brokerage.

Gozlan noted that under Flug’s predecessor, Stanley Fischer, Israel successfully weathered the global financial crisis a decade ago. While also originally an academic, African-born Fischer gained experience at the World Bank and the International Monetary Fund before heading the Bank of Israel.

At the Wharton School of the University of Pennsylvania, Yaron’s teaching focuses on investment and asset pricing, international investments and multinational firms — areas that have revealed little about his monetary policy views.

Bank Leumi Chief Economist Gil Bufman said the central bank has not paid a lot of attention to asset inflation — mainly in corporate and government bonds and housing prices — so Yaron is likely to “add this area to the considerations of monetary policy,” as Bufman put it. While Israeli asset prices have outstripped consumer inflation, how Yaron will act remains unclear.

“There is definitely uncertainty in that he doesn’t know what his policy will be because he hasn’t formed policy yet,” said Eugene Kandel, a professor of economics and finance at Hebrew University.

“But I don’t think we should be worried about somebody tomorrow going back to the gold standard,” added Kandel, a former economic adviser to Netanyahu.

>> Read more: The Bank of Israel's New Chief Faces a Steep Learning Curve | Analysis 

Still, economists believe the bank’s six-member Monetary Policy Committee may become more hawkish under Yaron. “You are replacing Flug on the dovish side with someone who, if I had to guess, will be someone more hawkish because of his background in asset and risk pricing,” said Barry Topf, chief economist at the Saga Foundation and a former Monetary Policy Committee member.

Since Flug replaced Fischer in 2013, the Bank of Israel has continued to largely pursue the government’s annual inflation target of 1 to 3%. In recent years, inflation has mainly been well below that target, so the benchmark rate has remained ultra-low.

Last week, the bank’s own economists pushed back their projection for a rate increase to the first quarter of 2019 from the fourth quarter. This was due to an easing of inflation to 1.2% in August and expectations that it will temporarily dip below 1% in the coming months.

Israeli financial markets have been muted on Yaron’s nomination. “Markets are in a waiting position because they don’t know which direction to react,” said Eyal Klein, head of trading and sales at Mizrahi-Tefahot Bank. “They would like to first hear him speak to see where he is going.”