Months of verbal attacks on Israel’s central bank and Governor Amir Yaron by members of the right-wing government are culminating in an unprecedented foray into the country’s monetary policy.
The criticisms are happening alongside mass protests against plans by the ruling coalition — the most religious Israel has ever had — to weaken the power of judges. Many economists fear that the Bank of Israel is next in line after the judiciary for Prime Minister Benjamin Netanyahu and his allies.
As Yaron approaches the end of his five-year term, several ministers have assailed him, with one saying he is a “savage” who has sabotaged the economy and should be fired.
Now coalition members have set their sights on the central bank’s sway over interest rates. That’s pitting Yaron — a Netanyahu appointee who was previously a finance professor at Wharton business school — against parts of a government that increasingly want monetary policy to reflect their populist goals.
If they get their way, Israeli assets could come under more pressure. The shekel has weakened around 4% this year, while Israel’s dollar bonds are among the worst performers in emerging markets, according to data compiled by Bloomberg.
“There is, undoubtedly, an increasing fear that institutions which the government deems too independent might be weakened,” said Karnit Flug, Yaron’s predecessor and now a vice president at the Israel Democracy Institute. “All 10 governors who have held office to this day were professionals with no political identity and it is crucial this remains the case.”
Politics-Proof
In the decade since Stanley Fischer left the post of governor to succeed Janet Yellen as vice chair of the US Federal Reserve, Israel’s central bank has overseen an economy that’s grown all but immune to politics, boasting one of the rare currencies to strengthen against the dollar since 2012.
That invulnerability has been pricked, however, after Netanyahu’s cabinet embarked on a fiercely contested judicial overhaul that put the independence of institutions at the center of public debate.
It wasn’t long before Yaron came under scrutiny.
Within weeks of the government taking office late last year, Eli Cohen — a former economy minister who’s now Israel’s top diplomat — criticized a rate hike and accused the central bank of bullying mortgage borrowers. Communications Minister Shlomo Karai called the governor disconnected and suggested he be replaced by a robot.
The chair of the Knesset’s economy committee, David Bitan, said the government is dominated by the central bank and therefore isn’t able to serve the people.
The showdown has left Netanyahu in a bind.
Telling Choice
While standing by the independence of the central bank and condemning the “savage” remark, the prime minister has just months to decide on reappointing Yaron or picking someone else.
Besides having the right background, the next governor must have a “firm backbone,” said Eyal Waldman, co-founder of Mellanox Technologies, an Israeli company purchased by Nvidia Corp. in 2020.
“This is an appointment that can affect Israel’s credit rating, and investors and banks are also keeping a close eye on it,” said Waldman, who’s now the chairman of a family investment fund.
Central bank independence has been called into question from Brazil to Turkey as politicians take a swipe at policymakers whose priorities come into conflict with their own. In the US, former President Donald Trump regularly castigated Fed Chairman Jerome Powell for not cutting borrowing costs aggressively enough.
In Israel, encroaching on the central bank has taken the shape of political attacks and legislative moves that could influence interest rates.
Late last month, the government pushed Yaron to embrace a law that would require him to mandate banks to pay minimum interest on checking accounts in consultation with the finance minister.
Yaron was able to delay the move. He wrote in a sharply worded letter to Netanyahu that it “constitutes a very serious blow to the independence of the Bank of Israel and its ability to manage monetary policy.”
Then Moshe Gafni, chair of the Knesset’s finance committee who failed to pass legislation capping interest rates for single homeowners, said the central bank had become abusive and parliament would step in.
“We will do what we see fit,” he said, threatening banks and regulators with “an explosion of new legislation.”
Yaron’s Choice
Meanwhile, Finance Minister Bezalel Smotrich attacked Israel’s bank inspector, a deputy of Yaron’s, saying in a highly unusual announcement that he would oversee him personally.
Now Yaron is facing a choice of his own.
A vocal critic of the judicial overhaul, Yaron said he’ll decide around September if he even wants another term.
The governor has warned the government’s efforts over the judiciary are inflicting a heavy toll on the economy. He’s pointed to the shekel’s “excess depreciation” and the under-performance of Israeli stocks.
Flug, the former governor, said the latest legislation requiring consultation with the finance minister amounts to interference.
“The law suggesting that interest rates be capped for single-homeowners was also going to hurt the effectiveness of the central bank’s monetary policy,” she said.
Netanyahu hasn’t made clear how he will proceed.
Should he choose to replace Yaron, names that regularly get mentioned in local media include Avi Simchon, who’s head of the National Economic Council that operates under the prime minister’s office, and Yaheli Rotenberg, accountant general at the Finance Ministry. Both are considered very close to Netanyahu.
Simchon and Rotenberg declined to comment. The Bank of Israel referred Bloomberg to Yaron’s answers to journalists on Monday.
It’s important to “maintain the strength and independence of the institutions,” he said. He spoke shortly after the Monetary Policy Committee held its benchmark rate at 4.75%, but signaled it was prepared to raise it further to fight inflation.
At a time when the aura of domestic risk is hanging over Israel, it’s unlikely the market can stomach a more political central bank. Moody’s Investors Service has warned that a deterioration of Israel’s governance and institutions poses a threat to the sovereign credit rating of A1, the fifth-highest possible and well above junk territory.
“Investors are realizing that in some cases there are no mechanisms to stop the government from overtaking forbidden territories,” says Omer Moav, professor of economics at the University of Warwick in the UK and at Israel’s Reichman University. “The government speaks of its right to govern, but what they want to do is rule. It’s yet to be seen whether Netanyahu can hold off his coalition partners.”
