The Bank of Israel left its benchmark interest rate unchanged after reducing it twice in three months, saying the economy was expanding and policy makers want to retain their ability to react to future developments.

The monetary policy committee, led by Governor Stanley Fischer, held the rate at 2.75 percent, the Jerusalem-based central bank said on its website today. Eight of 20 economists surveyed by Bloomberg forecast the decision, while 12 predicted a quarter-point decrease.

“Fischer prefers not to use up his ammunition too quickly,” said Yair Drori, chief analyst at Tachlit-Discount Portfolio Management Ltd. “Fischer is likely to lower the interest rate two or three times in the coming six months in line with economic developments in Israel and abroad.”

The central bank said in today’s decision that it was reducing its Israel growth forecast for next year to 2.8 percent from a September prediction of 3.2 percent, citing the European debt crisis. Fischer said Dec. 7 that the bank was likely to lower its forecast to “around” the Organization for Economic Cooperation and Development’s 2.9 percent prediction.

“Indicators of economic activity in Israel continue to support the assessment that the economy is still expanding, although more slowly than at the beginning of the year and during last year,” the central bank said today. The current rate “leaves the bank room to react to developments,” it said.

Slowing Inflation

Consumer prices rose 2.6 percent in November from a year earlier, the lowest increase in a year, Israel’s Central Bureau of Statistics said Dec. 15.

The shekel strengthened to 3.7724 a dollar at 5:46 p.m. in Tel Aviv from 3.7770 just before the decision.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, were unchanged at 2.47.

Economists’ 12-month inflation expectations declined to 2.2 percent from 2.3 percent a month earlier, the central bank reported Dec. 19. The government’s target range for inflation is 1 percent to 3 percent.

The central bank last cut its benchmark lending rate in November, lowering it by a quarter point. While Israel passed through the 2008-2009 crisis in “reasonable shape,” the economy is now being affected by the worsening global outlook and the Bank of Israel was justified in switching to a loosening monetary stance, the OECD said Dec. 12.

“The economic indicators are demonstrating quite strong growth,” Ron Eichel, chief economist at Meitav Mutual Fund Management in Tel Aviv, said prior to the decision. “It’s not a recession mode and the interest rate is quite low. The Bank of Israel is already in a very accommodative stance.”

To contact the reporter on this story: Alisa Odenheimer in Jerusalem at aodenheimer@bloomberg.net

To contact the editor responsible for this story: Louis Meixler at lmeixler@bloomberg.net

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