The new Bank of Israel Law was passed by the Knesset on March 16, 2010.
The old Bank of Israel Law was legislated in 1954, and already by the 1990s it was clear that it was unsuitable for the modern economic reality. After a series of comprehensive discussions in the Finance Committee, the Law passed its second and third readings in the Knesset on March 16, 2010, and will officially come into force on June 1, 2010.
Bank of Israel Governor Stanley Fischer spoke about the important innovations contained in the new law. Firstly, it defines the bank’s objectives precisely and ranks them as follows: maintaining price stability, supporting other goals of the government’s economic policy – particularly growth, employment and the reduction of social gaps – and supporting the stability of the financial system.
The new law explicitly gives the Bank independence in determining its policy tools and the way of implementing them in order to achieve the objectives. This independence, however, goes hand in hand with transparency, and accountability to the Knesset, the government and the public. The Law also changes the framework in which major decisions are made in the Bank of Israel. The previous law stipulated that the Governor alone would decide about the Bank’s policy and its management. According to the new Bank of Israel Law, decisions regarding the rate of interest and monetary policy in general will be made by a Monetary Committee, while the managerial decisions, including all matters related to the salaries of the Bank’s employees, will be approved by an Administrative Council. Both the Monetary Committee and the Administrative Council will include external members with appropriate professional skills.
The Law also stipulates the way in which salary changes for the Bank’s employees will be approved. After being approved by the Administrative Council, the changes will be submitted for approval to the Minister of Finance. In the event of disagreement about salaries between the Minister of Finance and the Bank, the matter will be resolved by the Prime Minister. The new Law also states that with regard to the salaries of the Bank’s employees, the Minister of Finance and the Prime Minister should take into consideration, among other things, the Bank’s unique personnel requirements and the labor relations within the Bank.
The Bank of Israel has already commenced the logistic preparations for integrating the members of the Committee and the Council, so that once they are chosen by the search committee to be set up by the government, they will be able to start working immediately.
Statement by PM Netanyahu at Bank of Israel reception
[translated from Hebrew]
I will speak briefly about three things: the Bank of Israel Law, the Bank of Israel and the Israeli economy.
First of all, with regard to the law: it regularizes and, moreover, establishes the Bank’s independence. This is a very clear statement. It is not an obvious one as it is not the result of ideology. This statement, this reading of the law, comes from experience. You can find yourself in certain situations, maybe even extreme ones, in which the Bank’s independence is not necessarily desirable. However, in the average experience of modern economies in the 20th and early 21st centuries, we discover empirically that economies that have independent central banks function better.
That is why this law is about the Bank’s independence, as well as its efficiency, the effectiveness of its work and the transparency of that work. I believe that everything is interconnected. However, this is a very clear decision not only to talk about the Bank’s independence, but also to anchor it in law.
In law-abiding countries – which we are – this has a greater meaning, and therefore this law, in my opinion, is significant and will stand the test of time. I feel that this rule of independent central banks is a golden rule and it is extremely important. We always respected this rule, but now we respect it and have anchored it in law.
Secondly, regarding the Bank of Israel – this Bank has benefitted from a long succession of esteemed Governors. It is true. Each of them was recognized for his integrity and professionalism, and thankfully Stanley has continued that tradition and even set higher standards for those who will follow. In my opinion, this has increased the Bank’s prestige in the world, which already was quite high. Before Stanley Fischer began his tenure as Governor of the Bank of Israel, the Bank of Israel was recognized as one of the highest ranked banks among central banks, with a stellar reputation. All the previous Governors played a role in this, as did the employees and their level of professionalism.
I believe that Stanley Fischer’s appointment as Governor only strengthened the impression that already existed, and I was thrilled that the Minister of Finance, Yuval Steinitz, joined me to make the obvious and simple decision that Stanley must continue serving in this position. I believe that this was a very important decision, together with the recent legislation…
Thirdly, I want to discuss the Israeli economy. Our economy is founded not only on a separation of authority, but first and foremost on the ability to make it worthwhile and easy to work and invest. If it is easy and worthwhile to invest, people will invest. If it is difficult and not worthwhile, they will not. Therefore, in some way, this is our competitive challenge. We are doing it – we are meeting this challenge today. However, today is today and tomorrow is tomorrow, and we must continue to reduce bureaucracy on the one hand, and on the other, of course, we must make it more worthwhile. For example, we could continue reducing taxes. Of course, there are many other steps that we are taking and even more steps that could be taken to improve infrastructure.
In the past two years, since the crisis, a theory has been introduced that everything I just said is not true. In other words, it claims that the engine that propels the economy is not the amount of private initiatives in the economy – of course, with occasional government assistance – but rather the balance between that same private initiative and government involvement must be changed. During the recent crisis there were those who determined that this balance had been violated and it is clear that we have entered a new era. It is not at all clear. I say that the opposite is clear. I think that one of the important things that happened in the Israeli economy is that we stayed true and faithful to this basic path which creates growth. People work and they invest if it is easy to work and easy to invest, and that is certainly what we have seen.
At the same time, there is one question I admit is a difficult one, and that is the question of regulation. This is a very difficult problem, and I don’t think there is one clear answer. It is clear that, at least in the financial sector in several countries, there was a lack of regulation, but we must not now move in the direction of too much regulation. This balance is a question of judgment and experience, but we very much need to make sure that we are not swept away by the wave to the other side. Because eventually, this "arterial" system through which money flows, the economy’s circulatory system, will be too choked – and then the economy is stopped in its tracks. That is why the question of regulation, especially financial regulation, is in my opinion one of the most difficult questions we face. We will have to make our views heard in this area, and I am glad we have a wealth of experience, wisdom and knowledge here.
Today, Israel’s economy is one of the leading economies in the developed world. This does not guarantee us anything unless we continue on the proper, measured path we have walked thus far. I think today we are celebrating an important day, and it is to his credit, to the Bank of Israel’s credit, to the Knesset of Israel’s credit and to the credit of the Israeli economy.