June 23, 2014 / 1:41 PM / 3 years ago

UPDATE 2-Bank of Israel cuts 2014 growth estimate, holds key interest rate

4 Min Read

* Lowers 2014 economic growth estimate to 2.9 pct from 3.1 pct

* Keeps 2015 growth forecast of 3.0 pct

* Bank's economists see key rate doubling to 1.5 pct in 2015

* Shekel appreciates to 3.445 per dollar, near 3-year peak (Adds details, analyst comments, shekel reaction)

By Steven Scheer

JERUSALEM, June 23 (Reuters) - The Bank of Israel trimmed its 2014 growth estimate on Monday following a weaker-than-expected start to the year but left its benchmark interest rate at 0.75 percent.

The central bank, which has kept rates on hold since a cut in February, said a disinflation trend persisted. It expects annual inflation to ease below 1 percent in the coming months before moving back to within the government's target of 1-3 percent in the next 12 months.

"It's possible the Bank of Israel is saving the rate cut for this drop," said Ori Greenfeld, chief economist at the Psagot brokerage, predicting another reduction in interest rates in the next few months.

Inflation held steady at 1 percent in May and the central bank expects it to average 0.4 percent in the fourth quarter before rising to reach 1.8 percent at the end of 2015.

Despite a revision to first-quarter economic growth - to an annualised 2.7 percent from an initial 2.1 percent - the bank said it was still below forecast. And "there are signs of moderation in the growth of private consumption, and the virtual standstill in goods exports continues against the background of moderation in world trade," it said in a statement released after its policy meeting.

Still, most indicators of confidence and expectations rose in the past month while the central bank's own economic performance index gained in May, it said.

Ten of 13 economists polled by Reuters had forecast no rate move on Monday. The shekel appreciated to a near three-year peak of 3.445 per dollar, from 3.453 prior to the rate decision.

Bank of Israel Governor Karnit Flug said this month that policymakers, who voted 6-0 to leave rates alone a month ago, were dealing with an unclear picture of the economy.

In keeping rates steady for July, the central bank noted that housing prices continued to rise in March-April at an annual rate of 8 percent.

Based on lower global growth forecasts, the bank cut its 2014 economic growth forecast to 2.9 percent from a previous estimate of 3.1 percent, its second downward revision this year. Excluding natural gas output, the economy is set to grow 2.6 percent this year.

The bank's staff sees economic growth of 3.0 percent in 2015, unchanged from its previous forecast.

"The expected growth in 2015 is led by exports, which are expected to grow with the improvement in the growth rate of global trade, and by investments," the central bank said. "At the same time, the growth rate of private consumption is expected to moderate slightly in the next two years."

It sees the unemployment rate rising to 6.2 percent in 2015 from 5.9 percent this year.

Bank of Israel economists forecast the key interest rate will end this year at 0.75 percent and rise to 1.5 percent by the end of 2015. However, they are independent of the Monetary Policy Committee which makes rate decisions.

"This increase is expected against the background of improved global economic conditions that will be accompanied by an increase in the global interest rate environment," the bank said.

For the Bank of Israel's rate decision please click:

here

For details on the revised growth estimates please click:

here (Additional reporting by Tova Cohen; Editing by Susan Fenton)

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