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UPDATE 1-Bank of Israel holds rates, sees economy improving this quarter

Steven Scheer
Monday, 25 Nov 2013 | 11:39 AM ET

JERUSALEM, Nov 25 (Reuters) - The Bank of Israel left its benchmark interest rate at 1.0 percent for a second straight month on Monday, citing a depreciation of the previously strong shekel and an expected pickup in economic growth this quarter.

The decision was the first for new governor Karnit Flug, who was officially installed as central bank chief this month after serving as acting governor since her predecessor Stanley Fischer stepped down at the end of June. She had been deputy governor since 2011.

Analysts believe the monetary policy committee (MPC) has turned a bit more dovish with Flug at the helm and with Nathan Sussman, head of research, now joining the MPC to replace the more hawkish Barry Topf, who has just stepped down.

However, analysts believe the easing cycle that began in September 2011 is over, although some say one more cut is possible in the next few months.

A recent weakening of the shekel has reduced pressure on the bank to cut rates to curb the strong currency, while a rise in inflation, to an annual rate of 1.8 percent in October, has given the bank less room to ease policy.

Still, the central bank said the inflationary environment remains low and that the inflation rate is expected to decline in the coming 12 months, allowing the bank to focus on the economy.

Inflation remains within the government's 1-3 percent target.

"In the third quarter, the growth rate declined and weakness was seen in manufacturing and exports, but initial indicators for the fourth quarter point to some recovery," the Bank of Israel said in a statement announcing the rate decision.

The shekel appreciated to 3.55 per dollar after the rate announcement from 3.56 prior to the decision, which had been widely expected.

The bank noted that unemployment continued to fall and employment increased in the third quarter, although hiring was focused in public services, in contrast to a virtual standstill in the private sector.

EXPORTS PICK UP

Israel's economic growth slowed in the third quarter to 2.2 percent on an annualised basis, from 4.6 percent in the second quarter, as exports fell 16.4 percent from the prior quarter.

Flug last week called the third-quarter performance "disappointing" although more recent data showed exports rose by $1.2 billion between September and October.

The central bank has forecast 3.6 percent economic growth this year.

The central bank noted that the shekel had depreciated by about 0.9 percent against the dollar in the past month, after gaining as much as 7 percent this year.

"The shekel's weakness was more moderate than that of most currencies against the dollar," it said.

The Bank of Israel cut its key rate in September amid concern over slowing economic growth and the effect on the export-dependent economy from the shekel's appreciation.

For more than five years, it has been cutting rates and buying dollars intermittently to weaken the currency and support exports.

It began its most recent easing cycle in September 2011 and has lowered its benchmark rate nine times from 3.25 percent.

Monetary policy in major economies remains very accommodative, it said, adding that there is still uncertainty about when the U.S. Federal Reserve will start to scale back its stimulus programme.

For the central bank statement on its rate decision, click on: http://www.boi.org.il/en/NewsAndPublications/PressReleases/Pages/25-11-2013-Inte r e s t . a s p x

(Additional reporting by Tova Cohen; Editing by Susan Fenton)