By Steven Scheer JERUSALEM (Reuters) - Israel is unlikely to cut interest rates again as the shekel is not strengthening as much as last year and the war in Gaza should not have a major impact on the economy, the central bank's deputy governor said.
The Bank of Israel unexpectedly cut its benchmark lending rate by a quarter point on Monday, taking advantage of very low inflation to contain the economic damage from the three-week old conflict in Gaza.
The benchmark rate is now at 0.5 percent, matching its record low set during the global financial crisis in 2009.
But Nadine Baudot-Trajtenberg, who became deputy to Governor Karnit Flug in February, said that monetary policy should now be loose enough.
"There is nothing theoretically that says you can't go further down. For the moment we don't feel that we need to do anything further. And not because it's a historical low that it means it's the end either," she told Reuters in an interview on Tuesday.
Israel's war with Palestinian militants in the Gaza Strip has disrupted business activity and dampened consumer spending and tourism, but Baudot-Trajtenberg did not expect the conflict to cause an economic shock.
"If we can learn anything from similar occurrences in the past, and hoping that the current event doesn't stretch so much longer, we don't expect it to have much impact on economic activity," she said.
"We have had similar instances and each one has had an impact that tended to be temporary and didn't leave a mark on economic activity," she said, pointing to a similar effect in Israel's financial markets. "It's not a trigger for weakening growth."
Still, the conflict could delay an acceleration in economic growth in the short term as consumer spending is too fragile to offset weak exports as security fears keep citizens at home.
"What it does say is that the expectation of a pickup, if it's not for the moment coming from world trade it could come from domestic activity, but the domestic activity is certainly this month not going to pick up," she said. "The background of what is happing this July ... is certainly not conducive to have a compensating domestic pickup."
STRONG SHEKEL
Before Monday's cut, the bank had kept interest rates on hold for four months.
The central bank officially projects economic growth of 2.9 percent for 2014 and a bank spokesperson said it was too soon to make a change due to the conflict in Gaza.
Exports account for 40 percent of Israel's economic activity. Montreal-born Baudot-Trajtenberg, who spent 20 years in the banking and finance sectors as well as in academia, said much of the economic slowdown was due to weak global trade.
Export competitiveness is being jeopardised by a strong shekel, which is trading at a three-year high against the dollar and has gained 10 percent since the start of last year.
Exporters have demanded more central bank intervention but Baudot-Trajtenberg said most of the shekel's strength took place in the first half of 2013.
"Most of the strengthening occurred last year," she said, citing the shekel's modest 2 percent gain versus a basket of currencies this year. "It doesn't mean we are not concerned by the strength of the shekel."
She downplayed the need for an exchange rate floor since countries with floors indicate very strong flows that do not necessarily reflect real economic fundamentals.
"If you look since the beginning of the year we haven't seen these strong flows on the shekel," she said.
Policymakers have attributed Israel's very low inflation rate - it hit a seven-year low of 0.5 percent in June - mostly to the strong exchange rate and other external factors, but Baudot-Trajtenberg said that was changing.
"Lately, the low level of inflation that we are seeing is also in part due to the lack of pickup in Israeli growth," she said.
Structural causes, such as a steep drop in telecoms costs - due to fierce competition - had also pulled inflation down, she said.
Inflation expectations show inflation in a year's time moving back into the government's 1-3 percent annual target.
(Editing by Susan Fenton)