* 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 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
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
"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
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.