Bank of Israel Studying Expansionary Steps, Says Governor Flug

Karnit Flug recommends next government increase tax collection, form committee to ensure financial stability.

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Karnit Flug holds up a newly designed 50 shekel banknote during its presentation at a news conference in Jerusalem, September 10, 2014.
Karnit Flug holds up a newly designed 50 shekel banknote during its presentation at a news conference in Jerusalem, September 10, 2014.Credit: Reuters
Ari Rabinovitch, Tova Cohen

REUTERS - The Bank of Israel is studying expansionary steps taken by other central banks such as quantitative easing and will implement similar measures if needed, its governor Karnit Flug said in an interview with the magazine of Israel's banking association.

In the interview, an advance copy of which was emailed to Reuters on Thursday, Flug also put forward recommendations for the country's new government, such as increasing tax collection in 2016 and forming a committee to ensure financial stability.

The Bank of Israel on Monday held its benchmark interest rate at 0.1 percent, citing a weaker shekel since a surprise rate reduction a month ago and a belief that inflation will move back above 1 percent next year.

Its own economists believe the key rate will stay at 0.1 percent the rest of 2015, though some analysts say the central bank may cut its rate to zero or even announce a plan for quantitative easing should the shekel start to strengthen.

"Since the global crisis, we have seen different countries take expansionary policy steps even when they get to zero interest rates," Flug told Bankaut magazine, in answer to a question about quantitative easing.

"We are studying them and looking at the steps taken by other countries, but the decision on which steps will be suitable will be made according to the circumstances."

The interest rate in Israel "must not be significantly higher" than levels around the world if it is to spur growth and employment, she added. The bank expects inflation to start rising after the first quarter.

Flug said that if the new government being formed by Prime Minister Benjamin Netanyahu is to meet its budget targets, it will have to raise tax collections in 2016, whether by cancelling tax breaks or increasing tax rates.

She also called for the formation of a committee to coordinate between market regulators, including the Finance Ministry, the central bank and the securities authority.

"Such a committee would deal with stability in the financial system, make sure information is passed between regulators and that there is much tighter coordination," she said.

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