Israel's central bank kept its policy rate steady at 1.75 percent, saying inflationary expectations for the year ahead are slightly below the bank's midpoint range and indicators are pointing to a slight improvement in the expectations for economic activity.
The Bank of Israel (BOI), which cut rates by 100 basis points in 2012, said that for the first time in a long while investment houses consider the risks to the global economy to have decreased, with the risk of a worsening of Europe's debt crises down, uncertainty about the U.S. fiscal cliff receding and data from the United States and China continuing to be positive.
In contrast, data from Europe show that economic activity still hasn't reached a turning point and the recession continues, the BOI said.
Israel's inflation rate rose by more than forecast to 1.6 percent in December from November's 1.4 percent but the central bank said it was in line with the seasonal path and inflation forecasts for the next 12 months based on market expectations eased to 1.5 percent. Market expectations for the central bank's policy rate one year from now is for 1.6 percent.
"The decision to keep the interest rate for February 2013 unchanged at 1.75 percent is consistent with the Bank of Israel's interest rate policy, which is intended to entrench the inflation rate within the price stability target of 1-3 percent a year over the next twelve months, and to support growth while maintaining financial stability," the BOI said in a statement.
Economic activity is Israel have stabilized, the BOI said, and indicators "signal a slightly improvement in expectations for growth over the coming 12 months," with improvement seen in manufacturing, retail and services.
The bank's research department assesses Gross Domestic Product growth of around 3 percent with the rate of increase in home prices continuing to rise. The first impact of the loan limitations that went into effect at the start of November are expected to be seen in the beginning of January, the BOI said.
The BOI's assessment of the economy is slightly more upbeat than in December when it said it expected fourth quarter growth to decline from the third quarter and cut its growth forecast for 2013 to 2.8 percent from 3 percent.
The latest GDP data are from the third quarter, showing annual growth of 3.0 percent, down from 3.1 percent in the second quarter.