New central bank chief Flug tells Israel to become more productive

JERUSALEM (Reuters) - Israel's new central bank chief Karnit Flug told her country on Wednesday it needs to reduce bureaucracy, become more productive and encourage a more diverse workforce.

Flug, 58, has been acting governor since her predecessor Stanley Fischer stepped down in June. She had served as the Bank of Israel's deputy governor for 5-1/2 years.

Speaking at a ceremony in Jerusalem where President Shimon Peres appointed her formally to the role, Flug said she would stick to established policies of keeping annual inflation between 1 to 3 percent, supporting economic growth and keeping the financial system stable.

But she said Israeli workers were less productive than those in most advanced economies and the state should do more to encourage sectors with low employment - a reference to Arab women and ultra-Orthodox men - to join the workforce.

"We must find the way to increase the attractiveness of investment in the economy and to increase capital stock, to improve the competitive environment in which the business sector operates, and to reduce the bureaucratic burden," she said.

"The expected demographic trends do not support a high rate of growth in the coming years, and we will need to act to offset the effects on growth of those trends in order to continue to grow at a satisfactory rate," Flug added.

The economy is set to grow 3.6 percent in 2013, with the central bank forecasting 3.4 percent growth in 2014.

The Israeli government chose Flug - the first woman to head the central bank - last month and appointed her on October 27 at the end of a rocky nomination process.

Under her leadership, the monetary policy committee (MPC) lowered short-term rates by a quarter point in a surprise move in September to try to halt the shekel appreciation that was harming the export-dependent economy.

The next rate decision is on November 25.

Flug also called on Wednesday for a financial stability committee where the three main regulators - the Bank of Israel, the Finance Ministry and the Israel Securities Authority - share information to "significantly reduce the probability of a threat to the financial stability in Israel's economy in the future."

For the text of Flug's speech, see: http://

(Writing by Ori Lewis; Editing by Steven Scheer/Ruth Pitchford)