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Bank of Israel Governor Karnit Flug's decision to withdraw in November added to doubts about local financial markets whether the bank's accommodating political committee would raise interest rates from here the end of 2018.
Even before Flug made a second term, after many public battles with Finance Minister Moshe Kahlon, the markets were unsure of the bank's expectations for a 15-basis-point rate hike in the fourth quarter. His departure makes the situation even worse: the markets have no idea who will replace it and have already expressed their preference against two contested candidates.
"There is uncertainty and worry in the market.We do not know who will be the next governor and if there will be a postponement of [Flug’s] stable approach and accommodating or there will be someone with different ideas, "said Gil Bufman, chief economist of Bank Leumi. "The closer we get to the date and there's no name there and no clarity, we'll see the hbadle of the market."
Flug takes the reins in November 2013 after the departure of Stanley Fischer and she remains largely faithful to his policy. The Monetary Policy Committee has left the benchmark interest rate at 0.1% since early 2015, choosing not to embark on negative rates, with moderate economic growth and an annual inflation rate less than 1% -3%.
The six – member panel will meet again on October 29, 8 and 26 – its last year 's gathering. The October meeting will probably be the last of Flug.
While the central bank reiterated this month an anticipation of a small rise at the end of the year and another one quarter in 2019, market players are less some since the bank wants to see inflation "cut off" in the target range.
Although the annual inflation rate reached 1.3% in June, it is the first time that it has exceeded 1% since 2014.
The minutes of the July 9 meeting showed that the committee remained cautious about the pace of inflation gains, saying that an untimely rise could delay rooting and slow down the pace increases.
Highlighting market doubts, the one-year bond yield was 0.2%, while the two-year yield was 0.4%.
Some in the market believe that inflation is rising and the bank will increase its prime rate to 1% by the end of 2019.
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Others are waiting for a slower rate process that will not start until next year, partly to give the shekel time to weaken. According to them, a rise in rates would boost the currency and hurt exports.
Some also wonder if Flug would choose to start the rate hike process at his last meeting or leave it to his successor or Deputy Governor Nadine Baudot-Trajtenberg if she becomes interim leader.
"Will Nadine be willing to raise rates?" Said Jonathan Katz, Chief Economist at Leader Capital Markets.
Flug said on July 6 that she would not seek a second term, although the writing has been on the wall since March, when Kahlon – dissatisfied with the central bank's criticism of its policies. Housing and Tax – said that he began looking for a new governor.
While Prime Minister Benjamin Netanyahu is going to appoint the head of the central bank, Kahlon's spokesman said, "They are pretty coordinated about this, but they still have not decided to do it. ;a name."
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One of the wishes of the market is that the position be entrusted to a professional economist and not to the accountant general Rony Hizkiyahu or his predecessor Michal Abadi-Boiangiu, who would also be candidates.
"I hope it will not be an official or a political appointment," said Rami Dror, CEO of Halman Aldubui investment house. He said that the right person must be an independent thinker able to confront politicians.
Other names have been widespread. Eugene Kandel and Zvi Eckstein have said that they are not interested. Former governor Jacob Frenkel, a Netanyahu favorite who was expelled in 2013, said he liked his current position as president of JP Morgan Chase International.
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