Israel cabinet approves law to reform central bank

JERUSALEM (Reuters) - Israel's cabinet approved a draft of a law on Sunday that would overhaul monetary policy and other decision-making by the Bank of Israel, the finance ministry said.

The law was submitted by Prime Minister Benjamin Netanyahu and Finance Minister Yuval Steinitz.

It has been in the works since Netanyahu was prime minister the first time, in the 1990s, and is aimed at strengthening the central bank's independence.

The ministry has two weeks to make revisions and then submit it to parliament for final approval.

The cabinet's vote comes two weeks after Netanyahu was forced to settle a bitter dispute over supervision of Bank of Israel wages between the finance ministry and central bank. The dispute had blocked the reforms from moving forward. [ID:nLN875455]

"While the draft law ensures the independence of the Bank of Israel, it also demands transparency and allows for better oversight of bank decisions," a statement from the Prime Minister's Office said last week.

"The current Bank of Israel Law is from 1954 and except for minor changes has not been amended to fit either the current economic reality or the functions and responsibilities of central banks around the world," it said.

According to the draft law, a six-member monetary committee -- composed of three central bank and three public representatives -- will be established to set monetary policy.

The governor of the Bank of Israel is currently the lone decider of interest rates, albeit after discussions with central bank department heads.

An administrative council will also be established to approve the bank's annual work plan and budget, with most of its members being from the public.

Bank of Israel Governor Stanley Fischer, a former Citigroup vice chairman and first deputy managing director at the International Monetary Fund, has been fighting for the central bank reforms since he took office more than four years ago.

Israeli media had speculated that failure to turn the Bank of Israel into a central bank like the Federal Reserve or Bank of England would push Fischer -- a professor of Fed Chairman Ben Bernanke -- to decline a second five-year term.

(Reporting by Steven Scheer; editing by Simon Jessop)