By Steven Scheer
JERUSALEM, July 29 (Reuters) - The Bank of Israel, at its first policy meeting without long-time governor Stanley Fischer, signalled on Monday that it was in no rush to lower short-term interest rates again as the economy continued to grow moderately.
It held its benchmark interest rate at 1.25 percent for the second month in a row at Monday's meeting, the first under Deputy Governor Karnit Flug, who is acting central bank chief since Fischer stepped down at the end of June after eight years as governor.
While the market had expected the bank to keep rates steady, investors had been curious to see how Flug would respond to a rebound in the shekel and whether she would continue Fischer's policies of trying to prop up the dollar and euro.
In a statement, the bank indicated that it was not too concerned about a sharp economic slowdown.
'Indicators which became available in the past month point to continued growth of economic activity at the relatively moderate pace of the past two years, which eased concerns of an additional slowdown in growth,' the Bank of Israel said, while also citing recent rate cuts as a factor in holding rates this month.
The shekel strengthened to 3.58 per dollar after the statement, from 3.59 beforehand.
While central banks in other emerging markets such as India, Indonesia and Turkey have recently raised some interest rates to support their currencies, Israel's shekel is strong.
The Bank of Israel cut rates twice in May to tame the currency that was harming Israeli exports and risked curbing economic growth.
The bank said on Monday that the global economy presented a 'mixed picture', with an apparent recovery in the UK and Japan, a recession in Europe, weakness persisting in emerging markets and mixed data in the United States.
It noted that against the background of continued expansionary monetary policies in major economies, the shekel gained 0.9 percent in terms of the effective exchange rate the past month.
The shekel has avoided the rout in its emerging peers since the U.S. Federal Reserve signalled it could scale back stimulus, boosting the dollar, partly because Israel's current account is expected to get a boost from the start of natural gas production in March and because Jacob Frenkel, nominated to succeed Fischer, is known to oppose very low interest rates.
The nomination of Frenkel, who was governor in the 1990s, has run into trouble, however, and the bank could be without a governor until at least October. That is unlikely to stop the Monetary Policy Committee from adjusting policy if they see the need, though, analysts say.
Frenkel's nomination has been derailed after the Justice Ministry said this month that the attorney general would investigate a suspected shoplifting incident in Hong Kong involving Frenkel in 2006. Frankel, who was central bank governor in the 1990s, has called the incident a 'misunderstanding.'
In the past month, the shekel has gradually appreciated to 3.59 per dollar, close to the 17-month high that triggered the rate cuts in May and more intervention in the foreign exchange market.
Annual inflation in June jumped to 2 percent due to a hike in taxes, but economic data has pointed to a slight slowdown.
Israel's economy is forecast to expand 2.8 percent this year and 2.5 percent in 2014, excluding the contribution of natural gas production, compared with a 3.2 percent expansion last year.
(Editing by Susan Fenton) Keywords: ISRAEL RATES/
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