August 6, 2012 / 10:06 AM / 5 years ago

RPT-UPDATE 1-Israel July rate decision unanimous-minutes

(Repeats to fix typo, add link to cbank website) (Adds details, quotes from central bank/analysts)

By Steven Scheer

JERUSALEM, Aug 6 (Reuters) - Israel's central bank policymakers were unanimous in voting to leave interest rates on hold last month, waiting to see if the economic environment was deteriorating further, central bank minutes showed on Monday.

The Bank of Israel cut interest rates in June for the first time since January, and analysts expect more rate cuts this year to shore up the economy.

Policymakers at the July meeting said a 13 percent drop in manufacturing exports in June, excluding diamonds, was extraordinary and it was not clear whether the decline marked the start of a broader trend or was a one-off figure, according to the minutes.

"While it is possible that this is an exceptional monthly figure which reflects unusual volatility, the possibility also exists that a decline in such a wide range of export industries is a result of a sharp decline in global demand," the minutes said. here

Exports account for more than 40 percent of Israel's economic activity, with 35 percent of exports going to Europe.

All six members of the central bank's monetary policy committee voted to keep the benchmark interest rate at 2.25 percent on July 23, the minutes showed.

The central bank, which cut its benchmark rate by a quarter point in June on worries the global slowdown would harm Israel's economy, tends to change rates on alternate months and not on consecutive months.

The Bank of Israel forecasts economic growth of 3.1 percent in 2012, above most economists' estimates of around 2.5 percent. The bank projects the economy grew by an annualised 2.8 percent in the second quarter after a 2.7 percent increase in the first three months of the year.

"Uncertainty increased as to whether the growth rate of slightly below 3 percent was maintained in the second quarter, or whether it declined in recent months. Uncertainty also increased with regard to developments in the global economy, particularly in Europe," the minutes said.

The Bank of Israel also expressed concern over fiscal policy and the government's late June announcement that it was raising the 2013 budget deficit target to 3 percent of gross domestic product, from 1.5 percent.

Central bank Governor Stanley Fischer had warned that looser fiscal policy could affect inflation effects and lead to rises in interest rates.

"Committee members ... decided that at this point fiscal conduct is not a factor influencing monetary policy," the minutes said, citing uncertainty over how the state would handle the wider deficit and its impact on inflation and growth.

"Missing the deficit target may have a negative impact on the government's credibility," the central bank said.

The government last week unveiled an austerity package of tax hikes and spending cuts to keep the deficit in check.

"The budgetary restraint should make it easier for the Bank of Israel to decide on additional interest rate reductions, if the weak economic data in Israel and globally persist," said Michael Sarel, head of research at Harel Insurance and Finance.

Economists expect the bank to cut its key interest rate to 1.75-2 percent in the next few months, with some predicting a rate cut on Aug. 27.

The Bank of Israel noted that while annual inflation has eased to 1 percent recent price increases of fuel and agricultural commodities abroad may boost inflation.

It added that a recent rise in home costs did not indicate a sustainable pick-up in prices. "But the risk inherent in a future renewal of such a trend cannot be ignored," it said. (Editing by Susan Fenton)

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