Israel's central bank held its policy rate steady at 1.25 percent, saying inflation is expected to remain around the center of its target range in the coming year, that recent rate cuts were a response to slower economic growth, home prices have moderated and the upward pressure on the shekel should ease as the U.S. Federal Reserve plans to remove its policy accommodation in the future.
The Bank of Israel (BOI), which cut rates twice in May to weaken the shekel currency, said it would keep a close eye on asset markets, including the housing market, and continue to monitor the impact of its recent steps, "particularly in light of the continuing uncertainty in the global economy," and would "act as necessary in the future."
It was the final decision by the BOI under present Governor Stanley Fischer, who is stepping down at the end of this month and being replaced by Jacob Frenkel, BOI governor from 1991 to 2000.
The Israeli shekel has come under upward pressure since mid-2012 as investors sought higher yields due to ultra-low interest rates in advanced economies, along with the start of natural gas production.
This year the shekel has risen by 2.4 percent against the U.S. dollar, trading around 3.64 per dollar today, but down from a high of 3.55 in early May following two BOI rate cuts the same month and a decision to intervene foreign exchange markets.
The BOI said the appreciation of the shekel against the dollar was in contrast to the global trend, taking place against the background of sales of domestic companies to foreign investors, a current account surplus in the first quarter and "extensive foreign exchange sales by nonresidents."
The Federal Reserve's announcement last week that it would start to taper its asset purchases later this year, assuming the economy continues to improve, has hit global financial markets hard with funds flowing out of many emerging markets, global stocks and bonds.
Bond yields in the U.S. have jumped and the BOI said that if this "increase, should it continue, is likely to moderate the forces for appreciation of the shekel."
Global growth forecast have recently been revised downward, the BOI noted, primarily due to weakening momentum in emerging markets, while optimism about the U.S. economy was "reflected recently in remarks by the Chairman of the Federal Reserve."
The Israeli economy appears to be slowing in recent months, the BOI said, pointing to economic activity indicators, with slower growth seen in the business sector, a worsening of investment and imports and a virtual standstill in the exports.
In the first quarter of this year, Israel's Gross Domestic Product grew by 0.66 percent from the previous quarter for annual growth of 2.7 percent, up from 2.6 percent.
The BOI's staff, which released its latest forecast, expects 2013 economic growth of 3.8 percent, including the effect of natural gas production, but 2.8 percent excluding gas output, down from 3.2 percent in 2012. The 2013 forecast is unchanged.
For 2014, the BOI staff revised downwards its forecast due to a fiscal program to tackle deficits, forecasting growth of 3.2 percent including gas output, down from a previous forecast of 4.0 percent, and growth of 2.5 percent excluding fast, down from 3.3 percent previously.
Israel's inflation rate, which rose slightly to 0.9 percent in May from 0.8 percent, is forecast at 2.1 percent in the four quarters ending in the second quarter of 2014, around the midpoint of the BOI's target of 1-3 percent.
The BOI's interest rate is forecast to remain at 1.25 percent a year from now.