The Bank of Israel (BOI), which has now cut rates by 75 basis points this year - including two cuts in May to stem the rise in the shekel - cut its forecast for growth this year to 2.6 percent from a previous forecast of 2.8 percent, excluding the contribution of natural gas production from the new Tamar site.
Including gas production, Israel's Gross Domestic Product is forecast to expand by 3.6 percent this year, down from 3.8 percent in the previous forecast.
Next year, Israel's economy is expected to slow down from this year due to a smaller contribution of gas output to economic growth, a decline in the growth of public spending and lower growth in private consumption due to higher taxes, the BOI said.
GDP in 2014 is forecast to grow by 2.7 percent, up from a previous forecast of 2.5 percent, excluding gas output. Including gas output, Israel's economy is forecast to growth by 3.4 percent, up from a previous forecast of 3.2 percent.
Israel's economy expanded by 1.2 percent in the second quarter from the first for annual growth of 3.69 percent, up from 3.16 percent and the highest growth rate in the last 18 months, boosted by the output from the recently opened gas field off the coast of Israel.
"The decision to reduce the interest rate for October 2013 by 0.25 percent to 1 percent is consistent with the Bank of Israel's monetary 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.
Israel's inflation rate fell to a lower-than-expected 1.3 percent in August from 2.2 percent in July due to lower clothing and food prices but forward expectations for two years and longer were stable at 2.3-2.6 percent. Private forecasters project September inflation to rise by 0.2 percent.
The BOI forecasts 2014 inflation of 1.9 percent, near the midpoint of its target range. The BOI's benchmark interest rate was forecast to decline in the fourth quarter to 1.0 percent and then rise to 1.25 percent at the end of next year.
While Israel's economy continues to grow at a rate that is similar to that of the previous two years - with higher domestic demand offsetting lower exports - the BOI said preliminary indicators for the third quarter point to a moderation of private consumption and "the global picture indicates a possible slowdown in the rate of improvement in advanced economies, with continued moderation in emerging economy growth."
The BOI cited the U.S. Federal Reserve's decision to push off the start of the tapering of its bond purchases until there is evidence of a sustained improvement in economic activity in light of "mostly weak" economic data this month, particularly employment figures along with the rise in bond yields and mortgage rates since the Fed's initial signal that it was planning to taper quantitative easing.
Data from Europe was also mostly negative this month, most indicators in Japan showed that the "economic recovery has halted" and in "China is appears that the economic recovery has halted" while most emerging markets indicate a slowdown.
Since the last meeting of the BOI in August, the shekel has strengthened 2.3 percent against the U.S. dollar and by 1 percent in terms of the nominal effective exchange rate against the euro, the BOI said. The shekel was trading at 4.76 to the euro today.
Since the beginning of the year, the effective exchange rate of the shekel is up by 6.7 percent.