The Bank of Israel (BOI), which last month made a surprise 25 basis point cut in its policy rate, said inflation was within the bottom range of the central bank's target range and it is likely that over the next several months it could fall below the range temporarily though it is expected to return to within the target range toward the beginning of 2015.
Israel's inflation rate fell to 1.2 percent in February from 1.4 percent in January. The BOI targets inflation of 1.0 percent to 3.0 percent. In April and May last year, inflation fell below 1.0 percent. In 2013 the BOI cut its rate by 75 basis points, partly in response to the strong shekel.
The BOI staff updated its forecasts, projecting inflation until the first quarter of 2015 at 1.6 percent and the central bank's benchmark rate at 0.75 percent through this year, "and to begin to be increased at a moderate rate in 2015."
Despite the further decline in inflation in February, the BOI said private forecasters' inflation projections were unchanged at an average of 1.6 percent over the next 12 months. Private forecasters do not expect the BOI to change rates in the next three months.
The BOI's rate cut last month was in reaction to the surprise fall in January inflation, pessimism among consumers and continued strength in the shekel.Despite the further decline in inflation in February, the BOI said private forecasters' inflation projections were unchanged at an average of 1.6 percent over the next 12 months. Private forecasters do not expect the BOI to change rates in the next three months.
Despite the BOI's rate cuts, the Israeli shekel has continued to appreciate and some economists are speculating that the central bank may impose a ceiling, similar to the currency limits imposed by the Swiss National Bank and the Czech National Bank.
In the past month, the shekel has appreciated by a nominal 1.0 percent and by 8.2 percent since the start of the year. Today it was quoted at 3.49 to the U.S. dollar.
Israel's economy continues to expand moderately, the BOI said, noting a recovery in private consumption and some increase in exports that are focused on high tech and business services.
But other manufacturing exports remain at a virtual standstill, it said.
Israel's Gross Domestic Product expanded by 0.56 percent the fourth quarter of last year from the third quarter, slightly up from 0.52 percent quarterly rate in the third quarter.
The BOI staff cut its 2014 growth forecast to 3.1 percent from a previous forecast of 3.3 percent. Excluding the impact of natural gas production, GDP is now seen expanding by 2.8 percent, down from a previous 2.9 percent.
In 2015 GDP is forecast to grow by 3 percent with natural gas production stabilizing and thus not contributing to GDP growth that year.
The BOI, which has often expressed its concern over high housing prices, said the pace of price rises moderated in March, rising by 6.3 percent over the past year, with a continued high volume of mortgages taken out.
"The housing market policy steps being considered are likely to lead to volatility in volumes of activity and in prices in the market in coming months," the BOI said.