Doctor Karnit Flug is starting her term as governor of the Bank of Israel at a distinct disadvantage.
Although she has been the acting governor for four months and was chosen by her illustrious predecessor, Stanley Fischer, everyone will remember that she was neither the first, nor the second, nor even the third choice of the prime minister and finance minister.
As the government’s senior financial adviser and the woman in charge of Israel’s monetary policy for the next five years, that means she has everything to prove.
But now that the farcical selection process is over — a particularly Israeli omnishambles in which two candidates were announced only to be disqualified after skeletons from their past emerged — Dr Flug can get to work.
She is seen as Mr Fischer’s spiritual successor and Benjamin Netanyahu was eventually convinced that they share similar economic principles.
That means she will be an interventionist when it comes to preventing over-valuation of the shekel and a trade deficit, and much less of an interventionist on inflation, especially on the critical issue of house prices.
In recent years, Israel has managed to keep unemployment down, an issue that is close to the new governor’s heart as an expert on the relations between macro-economics and the job market. She will therefore also worry about the weak dollar, which is bad for Israeli exporters.
She can be expected to leave interest rates low and, using the Bank of Israel’s healthy reserves, buy up more dollars if the shekel remains too strong.
Not using the interest rate lever, however, will give her little control over house prices, unless she can convince the banks to rein in their mortgage-lending — not something they will agree to easily.
Dr Flug will also have a say in how to use the billions that Israel is expected to reap from its new natural gas fields. Like her predecessor, she favours placing the money in a sovereign fund that mainly invests abroad, rather than splashing it on grandiose domestic projects and expanding the budget.
WHO IS DR FLUG?
Dr Karnit Flug, 58, was born in Warsaw and brought to Israel when she was three.
She received her PhD from Columbia University in 1985 and joined the Bank of Israel in 1988.
She is married with two children to Argentinean-born Professor Shaul Lach, head of the Hebrew University’s Economics Department.
Dr Flug espouses similar policies to her predecessor, Professor Stanley Fischer.
In her four months as acting governor, she has lowered the interest rate to 1 per cent and announced that the Bank of Israel will purchase $3.5 billion worth of foreign currency in 2014.
