UPDATE 3-Bank of Israel cuts key rate, sees weaker 2013 growth
* Benchmark rate of 1.75 pct lowest since September 2010
* Growth forecast reduced to 2.8 pct in 2013 excluding natural gas output
* Shekel's recent strength may make it hard for economy to deal with challenges
By Steven Scheer
JERUSALEM, Dec 24 (Reuters) - With Israel's economy expected to slow further next year, the Bank of Israel took advantage of a low inflation environment to lower short-term interest rates for the second time in three months on Monday.
The bank cut its benchmark rate to 1.75 percent - its lowest level since September 2010 - and lowered its 2013 economic growth forecast to 2.8 percent from a prior projection of 3.0 percent.
It was the second downward revision in three months from an initial estimate of 3.4 percent and stems from the International Monetary Fund's economic growth forecast for advanced economies of 1.5 percent next year.
Growth in 2012 is forecast at 3.3 percent, the bank said.
"Indicators of real economic activity continue to point to weakness, and further moderation in the rate of growth is likely," the Bank of Israel said.
"In addition, the shekel's recent strength may make it more difficult for the economy to deal with the challenges it faces."
The Israeli currency has moved to an eight-month high against the dollar at a rate of 3.74. The central bank is typically opposed to a strong shekel since it harms exports, which account for 40 percent of economic activity.
Adding natural gas production from the large Tamar well off Israel's Mediterranean coast, which is set to come online in the second quarter, the economy will grow 3.8 percent next year. But the bank noted it will have a marginal impact on employment.
Rather, the Bank of Israel pointed to a high level of risk from around the world and concerns that could harm Israel's economy while highlighting low inflation, in which the annual rate eased to 1.4 percent in November from 1.8 percent in October to stay well within an official 1-3 percent target.
"Against the background of the need to provide additional support for economic activity and the absence of inflationary pressures at this time, the monetary (policy) committee decided to reduce the interest rate by 0.25 percentage points," the Bank of Israel said, adding that the U.S. Federal Reserve expanded its quantitative easing programme while other central banks reduced rates this month.
Analysts had thought the rates decision could go either way, with the 14 economists polled by Reuters evenly split as to the outcome.
The central bank reduced its key rate in late October for the first time since June in a move aimed at supporting the economy while inflation was tame. It held steady a month ago, as the bank rarely moves in two successive months.
Some economists expect one or two more rate reductions in the first half of. The Bank of Israel's own economists also see a rate of 1.75 percent at least through the end of 2013, although the bank noted the forecast came prior to the latest rate cut. They also expect an inflation rate of 1.8 percent next year.
"The Bank of Israel seems to be implying that with this move, it is done with this rate cut cycle," said Daniel Hewitt, emerging markets economist at Barclays Capital. "However, it has said this before, and further declines in domestic growth (excluding natural gas) and price inflation could lead to additional cuts."
One factor against a rate reduction this month was a continued increase in housing prices in September and October and the central bank is trying to prevent a bubble.
It tightened mortgage rules last month but said it was too early to assess the impact on home prices.
"Lowering interest rates is expected to continue to support the real estate sector as an alternative financial investment," said Ofer Klein, head of economic research at Harel Finance.
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