(Bloomberg) -- The tariffs President Donald Trump has slapped on steel imports, and reciprocal measures from China, could end up hurting Israel if they spark a trade war, Bank of Israel Governor Karnit Flug said.
“I think if we go back from free trade this is bad news for the global economy, and it's certainly bad news for small, open economies such as Israel's,” Flug told Bloomberg TV in an interview broadcast Thursday. “I think we all benefit from free trade.”
The Bank of Israel has kept its benchmark interest rate at an all-time low of 0.1 percent for the past three years, even as the U.S. Federal Reserve has started lifting rates. Israeli monetary policy will be guided only by local conditions and won't follow other central banks, Flug said.
“I think that tighter monetary policy, to the extent that it reflects better economic performance in the U.S., is good news for the Israeli economy,” she said. “But generally, our policy is based on developments here.”
FX Moves
The growing gap between U.S. and Israeli rates has failed to reverse the shekel's strength against the dollar, a bane of Israeli exporters. In part, Flug said, the strong currency reflects the fundamentals of Israel's economy, which grew 3.6 percent in the final quarter of last year. The shekel also has strengthened against the euro, which Flug attributed to the European Central Bank's looser policy.
“I think there's some excessive pressure toward appreciation which is related to the relative accommodation of monetary policy, and that's what we've tried to offset by our intervention in the foreign exchange market,” Flug said. She declined to say if the bank also buys euros.
Flug dismissed suggestions, including from within the bank's monetary policy committee, to look at a broader range of factors, saying the bank's “flexible” inflation-targeting policy already weighs overall economic performance. Bank of Israel policy calls for rates to stay low until the inflationary environment is “entrenched” within the bank's target range of 1 percent to 3 percent.
“We've taken very seriously the ‘flexible' within that regime,” she said.
Role Model
Flug touched on some of her favorite themes in the interview, such as the need to train Israelis for a high-tech economy and to invest in public transportation. She said the heat seems to be coming out of Israel's housing market, but that the government must do more to expand supply.
“We've seen some initial signs of reduction of housing prices in the last few monthly readings, but I think there's room for more reduction,” she said. She dismissed the possibility that falling housing prices could spark a banking crisis: “We think the system is stable and safe, and can withstand even a fairly sharp correction in the housing market.”
As the first female Bank of Israel governor, Flug is one of just 13 women in the world running central banks. She noted that women serve in a number of senior posts in Israel's financial system, including as deputy Bank of Israel governor, chief executive officer of Bank Leumi Le-Israel BM, and heads of three financial regulatory agencies.
“Maybe it can serve as a model,” she said. -- “if we do a good job.”
To contact the reporters on this story: Michael S. Arnold in Tel Aviv at marnold48@bloomberg.net, Annmarie Hordern in London at ahordern1@bloomberg.net.
To contact the editors responsible for this story: Riad Hamade at rhamade@bloomberg.net, Amy Teibel, Karl Maier
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