Israel's central bank held its policy rate steady at 1.25 percent, saying economic activity has continued at its recent pace, making it less concerned over a further slowdown but inflation expectations are below the midpoint of the bank's target range.
The Bank of Israel (BOI), which cut rates twice in May to weaken the strong shekel, noted the currency's effective exchange rate had strengthened by 0.9 percent this month against a background of continued expansionary monetary policies in major economies.
The cost of homes, one of the BOI's concerns in recent months, eased by 0.1 percent in April-May and previous months' data have been revised down but "it is too early to determine if this represents a change in trend," the bank said.
Israel's inflation rate rose to 2.0 percent in June from 0.9 percent, the highest rate in 10 months, mainly due to a rise in VAT, along with higher prices for clothing, footwear, fuel and electricity.
Inflation expectations for the next 12 months by private forecasters eased to 1.7 percent after the latest inflation data while forecasts for the BOI's policy rate one year from now remained stable at 1.1-1.2 percent on average. The BOI targets inflation of 1-3 percent.
Economic activity in the second quarter is expected to be similar to the first quarter, though manufacturing exports continue to stand still, the BOI said.
"Indicators which became available in the past month point to continued growth of economic activity at the relatively moderate pace of the past two years, which eased concerns of an additional slowdown in growth," the bank said.
The third estimate of first quarter Gross Domestic Product growth was revised upwards to 2.9 percent, another factor that eased some of the BOI's concerns. In the fourth quarter, GDP rose by an annual 2.6 percent.
In March the BOI said economic activity was continuing to improve but it was still too early to tell if the economy had turned the corner.
"The Bank of Israel will continue to monitor developments in the Israeli and global economies and financial markets, particularly in light of the continuing uncertainty in the global economy," it said, adding it would use the tools available to achieve its objectives and also keep a "close watch on developments in the asset markets, including the housing market."