Israel's Little-Known Central Banker Lifts Veil on Priorities

(Bloomberg) -- The Bank of Israel’s new governor wasted no time laying out his priorities. At his appointment ceremony, Amir Yaron ticked off goals including measured rate rises, quicker inflation and low-key intervention in the foreign exchange market.

His agenda came as a welcome signpost in a country that knew little about his macroeconomic thinking: Unlike predecessor Karnit Flug, who spent much of her career at the bank, the Israeli-born Yaron had lived in the U.S. for more than two decades, until just weeks ago as a finance professor at the Wharton School of business in Pennsylvania.

At the ceremony, he spelled out his views:

  • The inflation rate should be stabilized at the center of the government’s 1-3 percent target range
  • The benchmark interest rate shouldn’t be raised too rapidly or aggressively because that may halt growth, but a delay could cause an outbreak of inflation
  • The exchange rate should be determined by market forces -- unless there are “anomalous fluctuations” in the exchange rate that aren’t in line with underlying economic conditions
  • The Bank of Israel will introduce new financial technologies to make the capital markets and financial system more efficient
Israel's Little-Known Central Banker Lifts Veil on Priorities

Plucked from academia by Prime Minister Benjamin Netanyahu, Yaron is inheriting the institution a month after its unexpected decision to raise interest rates for the first time in seven years, made at a meeting led by an interim governor. One member of the monetary committee dissented, saying it should wait for the new chief to be installed.

Yaron will also have to confront a slowing of Israel’s economic expansion, which analysts have attributed largely to the deceleration of global growth. After years of little to no inflation, the pace of consumer prices is within the target range of 1 percent to 3 percent, though at 1.2 percent it isn’t yet grazing the 2 percent midpoint Yaron aspires to.

With interest rates just up from an all-time low and global growth showing signs of sputtering, one of Yaron’s defining tasks may be navigating the shift in borrowing costs. Under Flug, the Bank of Israel lagged far behind the Federal Reserve in beginning to tighten policy.

“If you’re starting to raise rates now and you’re still at the lower band of inflation, you’ve got to have a theory on why they did it,” said Jim Leitner, president of New Jersey-based Falcon Management Corp., who trades the shekel. “Even though it wasn’t you, now you represent the Bank of Israel, now it’s up to you to tell us even if it wasn’t your decision at the time.”

Emphasizes Autonomy

Born in Israel in 1964, Yaron earned his undergraduate degree at Tel Aviv University. At the University of Chicago, where he obtained his doctorate, his thesis adviser was Lars Peter Hansen, who shared the 2013 Nobel prize in economics with Eugene Fama and Robert Shiller for analysis of how financial markets work and assets such as stocks are priced.

Yaron’s research also has focused on asset pricing, investments and finance, and he’s been a visiting scholar at the Federal Reserve Bank of Philadelphia. Israel’s central bank declined a request to interview Yaron before he began the job.

How he navigates the governor’s role as an economic adviser to the government will also draw scrutiny. The issue has taken on added significance as investors turn jittery about central bank independence from India to the U.S.

When Yaron was nominated, his long tenure outside Israel was cited as an advantage, since it leaves him with few local foes or allies.

“I believe he will be independent on monetary policy, while listening and being cooperative with the government,” said Zvi Eckstein, a former Bank of Israel deputy governor who’s known Yaron since college and is now dean of the Tiomkin School of Economics at the Interdisciplinary Center in Herzliya.

Flug, to Netanyahu and Kahlon’s mind, was a little too independent-thinking, with her warnings about planned tax cuts and investment priorities. They pointedly didn’t reappoint her to a second five-year term.

At Yaron’s appointment ceremony, Netanyahu emphasized the need for central bank autonomy -- and so did the new governor himself. Absolute independence “is a requisite for the bank’s optimal functioning” and reputation in Israel and abroad, he said.

Fiscal Discipline

In that same vein, Yaron emphasized the need for fiscal discipline -- something that threatens to fall apart as Israel approaches elections next year.

While Israel’s economy is “resilient and stable,” economic deterioration and a declining credit rating “can occur rapidly, like sliding down a slippery slope,” he said.

“The markets’ volatility and declines in recent months, the possible end of the current business cycle and the negative developments in world trade emphasize the importance of responsible fiscal conduct,” he said.

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