(Bloomberg) -- Amir Yaron, a finance professor at the University of Pennsylvania’s Wharton school of business, will be nominated as the next Bank of Israel governor, according to an Israeli government official with knowledge of the matter.
Yaron would succeed Karnit Flug, whose five-year tenure is drawing to a close next month amid acrimonious relations with Prime Minister Benjamin Netanyahu and Finance Minister Moshe Kahlon. The two men said they’ll make an announcement regarding Flug’s successor at 1:45 p.m. A Bank of Israel spokesman declined to comment.
Yaron would have to immediately grapple with two fundamental questions facing Israel’s 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, which has weakened in recent months. The Bank of Israel has kept its policy rate at 0.1 percent since early 2015, including in a monetary committee decision Monday.
Inflation Target
Yaron, who earned his doctorate at the University of Chicago, would take over as inflation has inched back into the government’s target band of 1 percent to 3 percent, after hovering around zero for more than three years.
A key question will be whether Yaron adopts the committee’s current stance that inflation needs to be entrenched within the target range for interest rate increases to begin in earnest. 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 key challenge will be what to do about Israel’s ballooning foreign currency reserves, which grew to $115 billion under Flug as she fought to keep a strengthening shekel at bay. 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.
Flug’s own appointment five years ago was tumultuous, even though predecessor Stanley 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.
Tense Ties
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 focus on infrastructure and human capital investment 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 the governor’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.
Yaron’s nomination would have to be vetted by a government committee. He’s little known to most Israelis, having lived in the U.S. for the past two decades. 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.