Bank of Israel seen leaving key rate at 1 percent next week

Reuters

* Rates decision expected Monday at 1530 GMT

* Cabinet to vote on Flug nomination as central bank chiefon Sunday

By Steven Scheer

JERUSALEM, Oct 24 (Reuters) - The Bank of Israel is expectedto leave short-term interest rates unchanged next week in whatcould be Karnit Flug's first decision as the country's centralbank governor.

All 10 economists in a poll by Reuters expected no ratechange when the decision is announced on Monday at 1530 GMT.Most foresaw no more moves the rest of the year.

After a series of snags and missteps in which two priorappointees dropped out, Flug earlier this week was nominated tothe post nearly four months after Stanley Fischer stepped downat the end of June.

As deputy governor for 5-1/2 years, Flug has been actinggovernor since July and under her leadership the monetary policycouncil (MPC) defied expectations with a quarter-point cut lastmonth that pushed the benchmark rate down to 1 percent.

The MPC voted 3-2 in favour of the cut, the first such movesince May and aimed at boosting exports by trying to halt anappreciation of the shekel, which is at a more than twoyear high versus the dollar.

According to minutes of the discussions, policymakers wereconcerned about a decline in exports and slower growth inprivate consumption. They also cited an expected moderation in government spending in 2014, when additional tax increases willalso come into effect.

Financial markets have welcomed the nomination of Flug,whose appointment will be brought to a cabinet vote on Sunday.She is widely expected to be approved and then needs to beformally installed by Israel's president.

"This appointment will help achieve policy continuity andremove various uncertainties in monetary policy making," saidTevfik Aksoy, an economist at Morgan Stanley, noting that Flugwas largely groomed for the position by Fischer.

Flug's main challenge will be to keep the shekel fromappreciating further. Partly due to the start of natural gasproduction that has improved Israel's balance of payments, theshekel has gained 7 percent against the dollar so far in 2013.

Interest rates are already very low and the Bank of Israelhas bought tens of billions of dollars the past five years,pushing foreign currency reserves to a record $80 billion. Withhousing prices continuing to rise, lowering rates again is seenby some as threatening a bubble.

Analysts, though, expect the MPC to remain dovish.

"We expect Flug and the MPC to continue to focus on boostingIsrael's benign exports by supporting a weaker shekel while atthe same time addressing the upward pressure on housing pricesby macro-prudential measures," said Nimrod Mevorach, economistat Credit Suisse, referring to steps taken to limit mortgages.

Israel's economy is expected to grow 3.6 percent in 2013 and3.4 percent in 2014, according to the Bank of Israel. Inflationis tame at an annual rate of 1.3 percent in September.

Flug has named Nathan Sussman, the head of research at theBank of Israel, to the MPC starting in November. He will replaceBarry Topf, senior adviser to the governor, who is stepping downat the end of October.

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