July 7, 2011 / 1:43 PM / 8 years ago

REFILE-Israel inflation expectations lower but trend unclear-central bank head

(Refiles to add word ‘inflation’ to headline)

LONDON, Jul 7 (Reuters) - Inflation expectations in Israel are being held down but it remains to be seen if stable oil and food prices can be sustainable, said Israeli central bank governor Stanley Fischer on Thursday.

Speaking to Reuters Insider TV on the sidelines of an investor conference in London, Fischer said the central bank has to stay flexible on its interest policy as the global outlook remains murky.

“Inflation has tamped down in part because we raised interest rates a lot. More importantly, energy prices have come down and food prices stabilised somewhat. Two of the causes of Israeli inflation have changed direction. Whether this is temporary we don’t know,” Fischer said.

After 10 interest rate hikes since August 2009, the Bank of Israel left its benchmark lending rate steady at 3.25 percent at its monthly policy meeting last week, citing concerns over the U.S. economy and the European debt crisis.

“We make interest rate decisions once a month because we need time to see what’s happening in the global economy. We have noticed in the last few weeks that the (economic) sentiment is changing favourably, certainly in Israel, and maybe elsewhere as well. But we’re still looking at a very unclear picture,” he said.

But Israeli exports, which had helped drive economic growth in 2010, had underperformed in the last three months. Fischer said it was uncertain whether this was a result of the strength of the shekel or due to weak global demand.

“We’ll have to analyse this to see what’s causing this change,” he said.

The central bank said it bought $425 million in foreign currency in June, higher than the $200 million in May to curb the shekel’s strength.

“We prefer not to intervene and we don’t intervene unless we think the market is going to places that are not consistent with where we think the equilibrium should be. We’re intervening less than we did two years ago and less than we did a year ago and we hope gradually go down to zero,” he said. (Reporting by Nick Edwards and Sebastian Tong, editing by Steven Scheer)

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