The bill would require commercial banks to pay interest on checking accounts at rates set by the central bank governor but with final approval from the finance minister.

The bill was approved on Sunday by a ministerial committee that oversees legislation and is due to go to a preliminary vote in parliament on Wednesday.

Yaron wrote a letter on Tuesday to Prime Minister Benjamin Netanyahu, made public by the central bank, urging him to intervene and remove the bill from the agenda.

Having the governor set a minimum rate with required approval from the finance minister would be "the most serious blow to the Bank of Israel's independence and its ability to conduct monetary policy," Yaron said in the letter. It would cross "a red line" that will be punished by foreign institutions and credit rating agencies, he added.

Israel's shekel weakened by 1% versus the dollar on news of Yaron's comments, while Tel Aviv share indices fell 1.1%.

The proposed legislation is the latest move by members of Netanyahu's coalition to encroach on the central bank's independence. A number of senior coalition lawmakers and ministers have in recent months publicly criticized Yaron for a cycle of interest rate hikes and voiced support for the government intervening, despite Netanyahu's repeated calls for maintaining central bank independence.

In a bid to battle persistent inflation the Bank of Israel has gradually raised its benchmark interest rate to 4.75%, from 0.1% in April 2022.

Proponents of the legislation say that rising interest rates allow banks to rake in huge profits at the expense of the public and that banks' refusal to pay interest on checking balances amounts to improper banking conduct.

Yaron said he strongly opposes intervention in bank rates and the setting of a uniform rate, arguing it would harm competition and efficiency.

The central bank governor has been critical of commercial banks for not passing along higher rates to deposit accounts as quickly as to loans. He noted that after a recent meeting with bank executives, banks had responded with higher rates to these accounts.

"This approach allows each bank to choose an optimal mix of measures that matches ... its clientele," Yaron said.

There was no immediate comment from Netanyahu's office.

Finance Minister Bezalel Smotrich backed the law on Monday, saying it was a first step but not sufficient. He said that at a meeting with Yaron on Wednesday he will discuss additional ways to ensure that citizens' money would "make money for them and not only for banks" and to ease the interest burden on households.