The Bank of Israel (BOI) held its policy interest rate steady at 2.25 percent and revised upwards its 2012 growth forecast but cut its 2013 forecast due to the fallout from Europe's economic contraction.
The Israeli central bank now expects the 2012 Gross Domestic Product to expand by 3.3 percent, up from a June forecast of 3.1 percent. The bank's upward revision follows that of Israel's Central Bureau of Statistics, which revised upwards it forecast for 2012 growth to 3.5 percent after 4.6 percent in 2011.
But the forecast for 2013 growth was revised down to 3.0 percent, from 3.4 percent previously, due to the impact of Europe's slowdown.
The forecast also looks for the central bank to keep interest rates steady until the end of 2013 and the inflation rate to accelerate over the next year due to higher indirect taxes, higher commodity prices and the past deprecation of the shekel. The inflation rate of the next four quarters until the end of the third quarter 2013 is expected to be 2.6 percent, the bank said.
Inflation in August rose to a higher-than-expected 1.90 percent from 1.35 percent in July, but the bank said this was due to supply side factors. Inflation expectations, however, remained stable.
The Bank of Israel has cut its interest rate by 50 basis points so far this year, most recently in June.
The Bank of Israel said the recession in Europe was deepening and signs of slowing in emerging economies persist while it appears that the slowdown in China "reflects real weakness."
"The level of economic risk from around the world remains high, and with it the concerns over negative effects on the local economy. Real economic data around the world continue to indicate weakness. Assessments are that the debt crises will continue to be a major risk," the bank said.