UPDATE 1-Israel central bank held rates on inflation outlook, modest growth -minutes

Mon Jul 7, 2014 3:57am EDT

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By Tova Cohen

TEL AVIV, July 7 (Reuters) - Bank of Israel policymakers held short-term interest rates steady last month on long-term inflation expectations that were within the target range and indications the economy is growing moderately, minutes of the discussions showed on Monday.

Five of six members of the monetary policy committee voted to hold the benchmark interest rate at 0.75 percent for a fourth straight month on June 23. One member voted to reduce the rate by 0.25 percentage points.

"Most committee members were of the opinion that the current level of the interest rate supports the economy's stable rate of growth, and that it is consistent with meeting a flexible inflation target, which allows a deviation for some time from the target range," the minutes said.

While inflation is expected to decline in coming months to below the lower bound of the government's 1-3 percent annual target, the central bank forecasts it will return to the target range within about six months.

Last month the central bank forecast economic growth of 2.9 percent in 2014 and 3.0 percent in 2015.

"Most committee members felt that maintaining the current level of the interest rate is consistent with the need to maintain financial stability in the asset markets, and noted in this regard the steps taken by the Supervisor of Banks in the mortgage market," the minutes said.

Committee members said that although there was an increase in housing prices in March-April and a continued large volume of mortgages were taken out, there was a slowdown in activity in the housing industry in the first quarter.

After the shekel's exchange rate had been stable early in the year, its appreciation renewed in the past month. Committee members said that did not derive from short-term capital flows.

They agreed that continued appreciation was due to a surplus in the current account, the large volume of direct investment in the economy, institutional investors hedging their investments abroad, and a stable macroeconomic situation.

Committee members discussed corporate bond spreads being at a low level and that mutual funds specialising in these securities increased their net investment.

"Committee members claimed that the low interest rate levels in Israel and worldwide increased the attractiveness of this investment vehicle, in a search for yield," the minutes said. "They agreed that the risks to financial stability deriving from this market should continue to be monitored."

One committee member supported reducing the interest rate in light of the moderation in the growth rate of private consumption, the assessment that inflation will decline in upcoming months to below the lower bound of the target, and the shekel's recent appreciation. (Reporting by Tova Cohen, Editing by Ari Rabinovitch and Catherine Evans)

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