By Steven Scheer
JERUSALEM (Reuters) - Jacob Frenkel, an inflation hawk who was Bank of Israel governor in the 1990s, will be returning to the helm of the central bank, Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid said on Sunday.
They appointed Frenkel to replace Stanley Fischer, who is stepping down at the end of June after eight years on the job, having guided Israel's economy through the global financial crisis.
Frenkel, 70, beat deputy governor Karnit Flug, who will likely be acting central bank chief until Frenkel starts. The date of his arrival was not announced.
"He is a world renowned figure, which is what Netanyahu was looking for," said HSBC economist Jonathan Katz.
As governor between 1991 and 2000, Frenkel was credited with reducing inflation, liberalising financial markets and removing foreign exchange controls.
He is currently chairman of JPMorgan Chase International and also served as vice chairman of insurer American International Group as well as chairman of Merrill Lynch International. Frenkel also is the head of the Group of Thirty, a private consulting group on international and financial issues.
"We are certainly talking about a governor who will act as the responsible adult, who will fill the position of Fischer with quality and authority," said Joseph Fraiman, chief executive at Prico Risk Management and Investments.
"No less important, Frenkel will benefit from the international credit that is greatly needed for the Israeli economy, especially in the current period," he added.
Frenkel, whose appointment needs cabinet approval, will face several challenges including continuing Fischer's insistence that the government stick to responsible policies and working to halt fast-rising home prices.
Israel's economy grew 3.2 percent in 2012, but is expected to slow to a 2.8 percent this year excluding the start of natural gas production.
Inflation, which ranged between 1.3 and 18 percent in the 1990s, was at an annual rate of 0.9 percent in May. At the same time, the shekel is strong.
To encourage economic growth and keep exports competitive, the Bank of Israel reduced its benchmark interest rate twice in May, to 1.25 percent. The central bank next decides on Monday and analysts largely believe the key rate will stay unchanged.
When Frenkel was last in the job, the governor alone made interest rate decisions. Now, there is a six-member monetary policy committee with the bank chief as chairman.
"Frenkel will need to work harmoniously with the monetary council he inherited from Fischer," said Yaniv Pagot, chief strategist at the Ayalon Group. "This is not a simple challenge that could, in a certain situation, bring the first cracks."
He said that, with Israel's foreign exchange reserves nearing $80 billion, it would be interesting to see whether Frenkel would continue intervening in the foreign exchange market and buy dollars to defend Israel's exports if the shekel continues to appreciate.
(Additional reporting by Tova Cohen and Allyn Fisher-Ilan; Editing by Robin Pomeroy)