The Bank of Israel (BOI) maintained its benchmark interest rate at 0.75 percent, citing lower-than-expected inflation and more moderate economic growth than expected last month.
The BOI, which unexpectedly cut its policy rate by 25 basis points in February, also repeated its guidance that the "path of the interest rate in the future depends on developments in the inflation environment, growth in Israel and in the global economy, the monetary policies of major central banks, and developments in the exchange rate of the shekel."
Other factors cited by the BOI in its decision include a weakening of the shekel's exchange rate in the last month and disappointing first quarter growth in the United States and Europe. Israeli home prices continued to rise in February and March with an elevated rate of mortgages and an ongoing decline in the risk characteristics of new mortgages. Building completions continue to grow, though there is an apparent slowdown in the number of building starts.
Israel's headline inflation rate eased to 1.0 percent in April, at the lower bound of the BOI's 1.0 to 3.0 percent tolerance range, from 1.3 percent the previous month, triggering a fall in inflationary expectations and an increase in the market's expectation of a BOI rate cut in the next three months.
Private forecasters' average projection for inflation over the next 12 months fell to 1.3 percent from 1.5 percent last month while expectations based on capital markets was 1.5 percent.
In its forecast from March, the BOI projected inflation at 1.6 percent until the first quarter of 2015, with the benchmark interest rates rising at a moderate rate in 2015.
But recent indicators of economic activity in Israel point to more moderate growth than the BOI expected last month though the extent of the moderation is uncertain.
"The range of data that became available this month leaves a lack of clarity about the state of real activity," the BOI said.
Israel's Gross Domestic Product expanded by only 0.53 percent in the first quarter from the fourth quarter of last year, mainly due to a contraction of private consumption and fixed capital formation. On an annual basis, first quarter growth was 2.84 percent, down from the fourth quarter's 2.89 percent, which was revised down from a previous estimate of 3.2 percent.
In March the BOI cut its 2014 growth forecast to 3.1 percent, with growth excluding the impact of natural gas production forecast at 2.8 percent. Growth in 2015 was seen at 3.0 percent.
"Emerging market weakness continues to weigh on global growth," the BOI said, adding that the probability of further monetary easing in Europe had risen while expectations remain that the U.S. Federal Reserve will begin to raise its federal funds rate in the second half of 2015.
The strength of the shekel was a major reason behind the BOI's rate cuts of a total 100 basis points since the start of 2013. But since May 20 the shekel has weakened and compared with the BOI's previous policy meeting on April 27, it is down by 0.6 percent against the U.S. dollar as of May 23, quoted at 3.48 to the dollar today.
In terms of the effective exchange rate, the BOI said the shekel's exchange rate was essentially unchanged but up by 4.4 percent over the last 12 months.
Israeli manufacturers called on the BOI this month to weaken the shekel to 3.8 to the dollar, effectively setting a target for the exchange rate similar to the Czech National Bank, which last November decided to intervene in foreign exchange markets to limit gains in the koruna.