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NEWSMAKER-Inflation hawk Frenkel returns to the Bank of Israel
June 24, 2013 / 1:06 PM / 4 years ago

NEWSMAKER-Inflation hawk Frenkel returns to the Bank of Israel

JERUSALEM, June 24 (Reuters) - When Jacob Frenkel last ran the Bank of Israel, his main concern was battling high inflation. More than a decade later, he will return to a vastly different situation: the need to keep the economy afloat amid global volatility and domestic fiscal woes.

Inflation is now less than 1 percent. The biggest problems are rapidly rising housing prices, slowing economic growth, a widening budget deficit and an angry public opposed to tax hikes and spending reductions while they struggle to make ends meet.

In choosing Frenkel, 70, who served as central bank chief between 1991 and 2000, Prime Minister Benjamin Netanyahu clearly sought someone with international experience who could quickly step into the huge shoes of Stanley Fischer, who departs at the end of June after eight years in charge.

Markets were mostly muted at the return of Frenkel, who is currently chairman of JPMorgan Chase International.

However, analysts were largely upbeat about the appointment, which still needs cabinet approval. They doubted he would stray too far from Fischer’s monetary policies, albeit with a more hawkish tilt.

“If and when circumstances change, his hand on raising interest rates may be easier. Presumably, in his term, interest rates will be slightly higher and inflation a bit more moderate than in identical circumstances with Fischer,” said Alex Zabezhinsky, chief economist at Meitav Dash Investment House.

Memories of the high interest rates of his previous term have already drawn out the critics and Frenkel himself admitted he did not want to return as governor.

But Netanyahu - rebuffed by several prominent U.S. economists - pressured him and he ultimately relented. Frenkel was governor when Netanyahu was premier in the late 1990s and the two had a good working relationship.

Frenkel will now be part of a six-member monetary policy committee rather than making interest rate decisions alone.

In a speech in Israel last week, he warned that despite the absence of inflation on a global scale, central bankers have to remain wary of a re-emergence.

“Don’t throw away the old textbooks. They may come in handy one day,” said Frenkel, who in the 1990s battled double-digit inflation with frequent interest rate increases.

He later added: “If you (as a central banker) are going to err, you should err in the direction of the long-term objectives. So, if you are now in an environment where inflation is too low, err in the direction of higher inflation.”


Frenkel’s policies succeeded in bringing inflation under control and he is credited with removing foreign exchange controls. But he often sparred with the Finance Ministry and his re-appointment was met with anger from a former director-general of the ministry who said Frenkel was an unworthy choice.

“As governor of the Bank of Israel in his first term he was considered anti-social and a representative of the most conservative capitalism, a person who perhaps ... does not see the broad public impact of his economic decisions,” Shmuel Slavin wrote in the Maariv newspaper.

“When he tried to eradicate inflation in the past, he imposed a high interest rate on the economy, and the social costs it exacted from the middle class and those of low socio-economic status were very high.”

Finance Minister Yair Lapid told Army Radio he supported the nomination and likened it to a call-up for reserve duty.

“He will receive a much lower salary and it won’t be easy for him,” Lapid said.

Frenkel, who beat out deputy Bank of Israel Governor Karnit Flug, has also served as vice chairman of American International Group and chairman of Merrill Lynch International. It is expected he will earn around $200,000 a year at the central bank.

“We don’t foresee a major change in the current Bank of Israel rate decisions policy, as the economic environment has significantly changed during the last 13 years both globally and locally,” said Modi Shafrir, chief economist at ILS Brokers.

“We believe that Frenkel’s appointment will support the current approach of the monetary policy committee of being ‘ahead of the curve’”. (Additional reporting by Tova Cohen; Editing by Toby Chopra)

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