JERUSALEM, Oct 29 (Reuters) - Tame inflation is allowing the Bank of Israel to lower interest rates to boost employment and the economy, Governor-elect Karnit Flug said on Tuesday.
Inflation stood at an annual rate of 1.3 percent in September and the central bank expects it to remain below 2 percent for the next year.
'Inflation ... has been within the target range for a long time, which provides monetary policy the required degrees of freedom to support growth and employment in the short term, thus moderating the effects of the global slowdown which is still a restraining force on activity here as well,' Flug told a conference.
The Bank of Israel held its benchmark interest rate at 1.0 percent as expected on Monday, saying the shekel currency had stopped appreciating since a surprise rate cut last month.
Flug - who had been deputy to former governor Stanley Fischer - said that based on growth rates Israel's economy is in good shape, especially compared to other developed countries. Damage to the economy from the global economy has been minor, while unemployment is at historically low levels.
Acting governor since July, Flug's nomination to formally take over the reins has been approved by the cabinet and now requires ratification by Israel's president.
Israel's economy is projected to grow 3.6 percent this year and 3.4 percent in 2014, according to the central bank.
Flug said Israel's economy will have trouble meeting its growth potential in coming years unless employment among the Arab sector increases - particularly among Arab women.
Israel's economy, she noted, suffers from a low rate of increase in productivity and the average Israeli produces lower output per hour than most OECD peers.
'Not only is the increase in productivity not closing the gap with the other developed countries, the gap is growing,' Flug said.
(Reporting by Steven Scheer) Keywords: ISRAEL CENTRALBANK/FLUG
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