The Bank of Israel (BOI), which cut its rate by 75 basis points in 2013, reiterated that it would keep a close watch on developments in asset markets, including the housing market, and continue to monitor the Israeli, the global economy and financial markets "particularly in light of the continuing uncertainty in the global economy."
Israel's inflation rate eased to 1.8 percent in December, slightly below the BOI's 2.0 percent midpoint of its 1-3 percent target range, from November's 1.9 percent.
Inflation expectation for the next 12 months derived from capital markets remain at 1.6 percent while private forecasters' projections average 1.7 percent, the BOI said. Data from the market "indicate some probability of one reduction in the Bank of Israel interest rate in the coming two months," it added.
Israel's economy is expected to continue to expand at a moderate pace with some improvement in the fourth quarter from the third when Gross Domestic Product grew by 0.58 percent from the second quarter for annual growth of 3.2 percent, down from 3.8 percent.
Fourth quarter exports of goods rose by 8 percent higher in the fourth quarter from the third quarter while imports of goods rose by 1.3 percent in the same period.
The BOI has forecast 2013 economic growth of 3.6 percent and 3.4 percent for 2014.
Israel's shekel, which has risen since mid-2012, appreciated by a further 1 percent against the U.S. dollar since the previous meeting by the BOI's policy committee meeting on Dec. 22. The BOI has been actively trying to hold down the shekel for months, not only by cutting interest rates but also by intervening in foreign exchange markets, to help the country's exports, which account for some 40 percent of the economy.
In December the BOI bought some $630 million of foreign exchange as part of its plan to buy some $2.1 billion of foreign exchange in 2013 to help offset the impact of natural gas production on the currency. This year the BOI has targeted purchases of $3.5 billion.
The shekel rose almost seven percent against the U.S. dollar in 2013 but was trading at 3.49 to the dollar today, down from 3.47 end-2013.
The BOI has also been trying to contain house prices and said rental prices, which are captured by the consumer price index, rose by 2.9 percent in 2013. Home prices, that are not included in CPI, rose by 0.5 percent in October-November following an decline in the earlier period. For the year ending November, home prices rose by 8 percent and the number of transactions rose again in October and November, as did investors' share in transactions.
The BOI noted the recent upward revision in growth forecasts by the World Bank and the International Monetary Fund, but said the upward revision was moderate and came after two years of downward revisions. In addition, projected growth of world trade continued to be revised downward.
The upward revision was due to improved U.S. economic growth and an improvement in the euro zone economy despite the weakness in emerging markets.
It also said that economic activity in Brazil showed slight improvement but the overall picture was still not encouraging and in India it was still too early to establish that the trend of moderation had halted. Taking note of capital markets in the last month, the BOI said there were not any extraordinary fluctuations, which indicates that the start of the U.S. Federal Reserve's tapering process had already been priced into markets.
The BOI added that the fall in equity markets and the decline in bond yields in the United States and Europe last week was "apparently due to data indicating the moderation of growth in China and due to disappointing corporate results in the US. There was also depreciation in the currencies of emerging markets, against the background of domestic events, among other things."