Israel rates call based solely on economic factors, says central banker

By Steven Scheer

JERUSALEM (Reuters) - The Bank of Israel held short-term interest rates last week because there was no economic reason to cut them, and not to defer any change in borrowing costs until a new governor was in place, a policymaker said.

"Obviously, the data were not telling us that we had to cut or raise rates and indicated that rates were appropriate where they were," said Barry Topf, senior advisor to the governor and a member of the monetary policy committee (MPC).

Some commentators have claimed the MPC opted to leave rates unchanged at 1.25 percent in the face of weak economic data in order to leave the key policy decision to the next governor.

"Absolutely not," Topf told Reuters in an interview on Tuesday. "It was not a consideration.... The decision was taken on the basis of the information we had and the situation of the Israeli and world economies."

In its first policy meeting since the departure of Stanley Fischer as governor, the central bank said it was not too concerned about a sharp economic slowdown. It also cited two rate reductions in May that were aimed at encouraging growth and weakening the shekel.

Topf said recent economic data had been mixed.

Israel's economy is expected to grow 2.8 percent in 2013 excluding natural gas production, which should add about another percentage point.

Fischer stepped down as central bank governor at the end of June, two years before the end of his ten-year tenure, leading to a transition period that the government has mismanaged.

Over the past two weeks, two nominees for the post - Jacob Frenkel and Leo Leiderman - withdrew, causing embarrassment for Prime Minister Benjamin Netanyahu and Finance Minister Yair Lapid.

Frenkel dropped out just hours after the rates decision.

The bank is currently being run by Fischer's deputy Karnit Flug, who was passed over twice to replace him. She has said she will resign once a new governor was in place.

A third nominee has not been made public.

Analysts have questioned Flug's commitment to weakening the shekel, which is at a two-year high versus the dollar and threatens export growth. The central bank reportedly intervenes regularly in the foreign exchange market but the amount of dollar purchases are not deemed enough to make a dent.

Topf said the policy of intervening when the bank believes there is a market failure out of line with fundamentals remained intact. This would not change under a new governor, he said.

"Changes in the shekel exchange rate are fairly minor," said Topf, who himself plans to step down later this year. "They may get headlines but it's nothing out of the ordinary."

The central bank releases minutes from the July meeting on Monday.

(Reporting by Steven Scheer; Editing by John Stonestreet)