Wharton Professor Amir Yaron Named Next Bank of Israel Head

(Bloomberg) -- Prime Minister Benjamin Netanyahu nominated Amir Yaron, a finance professor at the University of Pennsylvania’s Wharton school of business, as the next Bank of Israel governor.

Yaron, 54, will succeed Karnit Flug, whose five-year tenure draws to a close next month amid acrimonious relations with Netanyahu and Finance Minister Moshe Kahlon. The nomination must be vetted by a government committee.

The new governor, who has lived in the U.S. for the past two decades and whose monetary policy views are little-known in Israel, will have to grapple with two fundamental questions facing the Israeli economy: When to begin raising Israel’s record-low interest rate and how quickly to do it, a delicate process that could strengthen the shekel. The Bank of Israel has kept its policy rate at 0.1 percent since early 2015, including in a monetary committee decision Monday.

“I think that they actually were looking for someone who is suitable but will not be subjected to too much criticism for having connections in the Israeli economy,” said Omer Moav, a professor at the University of Warwick and the Interdisciplinary Center Herzliya. “He doesn’t owe anything to anyone in Israel, and that’s a huge advantage.”

The shekel and Israeli stock markets were largely unchanged after the announcement.

Inflation Target

Yaron earned his undergraduate degree at Tel Aviv University and his doctorate at the University of Chicago, where his thesis adviser was Lars Peter Hansen, winner of the 2013 Nobel prize in economics. He’ll take charge of the Israeli central bank as inflation has inched back into the government’s target band of 1 percent to 3 percent, after hovering near or below zero for more than three years.

A key question will be whether he adopts the monetary committee’s stance that inflation needs to be “entrenched” within the target range before interest rate increases begin. Annual inflation dropped to 1.2 percent in August, down from 1.4 percent the previous month, and the central bank’s research department on Monday pushed back its expectations for the first rate increase to the first quarter of next year.

Another challenge will be what to do about Israel’s ballooning foreign currency reserves, which grew to $115 billion under Flug as the central bank fought to limit the shekel’s gains. Flug’s policy came under sharp criticism from Netanyahu’s economic adviser Avi Simhon, and any signal that those purchases are coming to an end could strengthen the shekel.

Blank Slate

According to his resume, Yaron specializes in asset pricing, investments, risk-return strategies, macroeconomics and finance, and has been a visiting scholar at the Federal Reserve Bank of Philadelphia. His views on Israel’s economy and monetary policy aren’t evident.

“He’s a blank slate,” said Rafi Gozlan, chief economist at Israel Brokerage and Investments in Tel Aviv. “Almost nobody knows anything about him in Israel. It may be that he has unusual talents, but that’s not apparent from his academic background.”

In a note to clients, Gozlan called the appointment “something of a gamble” and contrasted it with the choice of Stanley Fischer, an eminent central banker who deftly managed the Bank of Israel during the Global Financial Crisis. If the idea was to have a BOI chief who won’t contradict the government, “the market will demand a higher risk premium accordingly,” Gozlan wrote.

Michal Ohana, managing director of business development at Mizrahi Tefahot Bank Ltd., said Yaron’s limited central banking experience suggests that the deputy governor, as well as the BOI’s research department, will exert more influence on upcoming interest-rate decisions.

Tense Ties

At a press conference announcing the nomination, Netanyahu hinted that Yaron’s way of thinking was closer to his than Flug’s, with whom he differed over tax cuts and investment of government resources. While saying he will respect the Bank of Israel’s independence, Netanyahu added that it’s good to have a meeting of the minds among the country’s economic stewards.

Flug’s own appointment five years ago was tumultuous, even though her predecessor Fischer, the former vice chairman of the Federal Reserve, indicated he wanted her to succeed him. She was passed over for two other candidates but they pulled out following unflattering press reports, and Flug was installed about a half-year after Fischer stepped aside.

Against this background, Flug’s relations with Netanyahu and Kahlon were tense. The first woman to head Israel’s central bank, she pushed the government to invest in infrastructure and human capital and opposed the tax cuts Kahlon favored. After the bank’s annual report earlier this year criticized Kahlon’s housing plan, Finance Ministry officials attacked Flug and Israeli media reported she wouldn’t be reappointed to a new five-year term.

One of Flug’s priorities was fighting excessive strength in the shekel, a policy she adopted from Fischer. Flug argued that a strong shekel threatened Israeli exports, but critics of her policy say that emphasis allowed Israeli companies to avoid improving their competitiveness.

Other finalists for the post included Bar Ilan University professor Ben-Zion Zilberfarb, Tel Aviv University professor Efraim Sadka and former Central Bank of Argentina governor Mario Blejer.

To contact the reporters on this story: David Wainer in New York at dwainer3@bloomberg.net;Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net

To contact the editors responsible for this story: Alaa Shahine at asalha@bloomberg.net, Amy Teibel, Michael S. Arnold

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