Too early to say Israel economy at turning point: central bank

TEL AVIV Sun Apr 7, 2013 10:05am EDT

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TEL AVIV (Reuters) - The Bank of Israel believes it too early to say whether signs of improved economic activity in Israel in the first quarter mark a turning point for growth, minutes of its interest rate discussions showed on Sunday.

The minutes followed a March 24 decision to hold the benchmark interest rate at 1.75 percent for a third straight month amid signs of economic stability and rising house prices.

"An analysis of macroeconomic data and the results of surveys indicate an improvement in economic activity in the first quarter of 2013," the central bank said.

It added, however, that it was too early to tell whether the improvement would be sustained or whether it signaled a temporary correction following weak growth in the previous quarter due to one-time factors such as operation Pillar of Defense.

In support of the rate decision, the central bank minutes noted that actual inflation and expectations for the coming year were around the mid-point of the target range of 1 to 3 percent.

All six monetary policy committee members voted to keep the key rate steady after cuts in October and December. They added, however, that the inflation environment did not impose a limitation on a reduction in lowering rates "if that becomes necessary".

On the other hand, they warned that failure to meet deficit targets in the coming two years might lead to an increase in the funding costs for government debt and an increase in rates.

"In order to abide by the expenditure rule, the government must reduce commitments this year by about 13 billion Israeli shekels ($3.6 billion). Even after such a reduction, the (2013) budget would reflect a real expansion of about 4.5 percent compared with the 2012 budget," the minutes showed.

The central bank's research department reiterated it expected economic growth in 2013 of 2.8 percent excluding natural gas production, or 3.8 percent with production, which started up a week ago. ($1 = 3.6260 Israeli shekels)

(Reporting by Tova Cohen and Maytaal Angel; editing by Jane Baird)

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