Bank of Israel Holds Interest Rate, Mulls Cut

While most economists expect steady policy ahead, some believe one more rate cut is possible by year-end.

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The Bank of Israel held its benchmark interest rate at 1 percent as expected on Monday, saying the shekel currency had stopped appreciating since a surprise rate cut last month.

The central bank also indicated the economy had some weak spots and said it expected inflation to remain subdued, suggesting the door remained open for future cuts.

While most economists expect steady policy ahead, some believe one more rate cut is possible by year-end.

"The picture of the state of real economic activity indicates continued growth at a rate slightly below 3 percent - excluding the effect of natural gas production - although several indicators point to some slowdown, primarily a decline in exports and industrial production, in the third quarter," the Bank of Israel said in a statement.

It also cited reduced global growth forecasts by the International Monetary Fund and market assessments that the U.S. Federal Reserve will delay scaling back its stimulus programme until the end of the first quarter of 2014.

Monday's policy decision was the fourth for the bank's governor elect Karnit Flug. All 11 economists polled by Reuters had forecast unchanged rates.

Acting governor since July, Flug's nomination to formally take over the reins has been approved by the cabinet and now just requires ratification by Israel's president, which is considered a formality.

The monetary policy committee last month cut its key rate by a quarter-point to its lowest level since December 2009 in a surprise move seeking to contain a rally in the shekel and as it saw slower growth in consumer and government spending in 2014.

Israel's economy is projected to grow 3.6 percent this year and 3.4 percent in 2014, according to the central bank.

It said that, in the last month, the shekel's appreciation trend has halted, weakening by 0.7 percent versus the dollar "while most currencies strengthened against the dollar."

The shekel stood at 3.53 per dollar on Monday, little changed in the past month.

In keeping rates steady, the central bank said since the rate cut a month ago, both interest rate and yield gaps with advanced economies had narrowed. It said inflation was expected to remain modest at below 2 percent for the next year. It was 1.3 percent in September.

Karnit Flug: Finally the leaders saw the light. Credit: Emil Salman

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