New Israel Central Bank Chief Says His Challenge Would Be Normalizing Rates

Amir Yaron aims for middle ground between rapid rate rises and delaying them

New Bank of Israel Chief Amir Yaron at a press conference, Jerusalem, December 24, 2018.
Eyal Toueg/Bank of Israel Spokesperson

Speaking in public for the first time in his new role as Bank of Israel governor on Monday, Amir Yaron said normalizing monetary policy was the most pressing challenge facing the Bank of Israel.

His comments, made at a ceremony marking his appointment, follow an unexpected vote by policy makers on November 26 to raise interest rates for the first time in seven years after they were cut dramatically during the global financial crisis. That took the benchmark rate to 0.25% from 0.1%, where it had stood since 2015.

“It is important that the interest rate not be raised too rapidly or aggressively, as that may halt growth, but also not with a delay that is liable to cause ... an outbreak of inflation,” said Yaron, 54, who was a professor at the Wharton School of Business at the University of Pennsylvania. He said he viewed interest rates “as the main and most effective tool for directing monetary policy.”

An Israeli who has lived in the United States for two decades, Yaron was formally sworn in as governor on Monday by President Reuven Rivlin and Prime Minister Benjamin Netanyahu. He replaces Karnit Flug, whose five-year term ended last month. The Bank of Israel’s next policy meeting is on January 7.

Yaron said the shekel exchange rate should be determined by market forces “without the need for significant intervention in the foreign exchange market.” But, he added, the bank would continue to act if there are fluctuations in the exchange rate that are not in line with underlying economic conditions.

Over the past decade, the Bank of Israel has bought more than $80 billion in foreign currency to prevent the shekel from strengthening too rapidly and harming exports. Other challenges include maintaining financial stability, supporting economic growth, encouraging productivity and sticking to responsible fiscal policies, he said.

“The Israeli economy and financial system are resilient and stable, but the markets’ volatility and declines in recent months, the possible end of the current business cycle and the negative developments in world trade highlight the importance of responsible fiscal conduct,” Yaron said. He said that, together with other regulators, the bank would examine the adoption and integration of financial instruments that were tried successfully elsewhere to broaden financial services to consumers and businesses.

Yaron said solid economic growth in recent years was helped by prudent budget policies and a drop in Israel’s ratio of debt to gross domestic product to around 60%. But he warned that economic deterioration and credit rating declines “can occur rapidly, like sliding down a slippery slope.”

Israel’s economy is estimated to have grown about 3.5% in 2018 and a similar pace is expected in 2019.

Netanyahu said he saw two key tasks for Yaron — increasing banking competition and raising the level of technology to enable better access to credit for all businesses.