The International Monetary Fund on Tuesday raised its 2007 growth outlook for Israel by half a percentage point and said that in light of calm inflation and a strong shekel, further interest rate cuts might not be necessary.
For 2007, the agency forecast real GDP growth at 4.5 percent, compared with its forecast in November of 4%.
Driving the growth are improving internal security and productivity,"buoyant" external demand, falling risk premiums, and "sound macroeconomic policies," the agency said in the latest report, issued after its staff conducted its annual economic fact-finding effort and discussions with the country's officials.
The IMF's directors said that while Israel's inflation rate had been falling, driven in part by a stronger shekel, they supported the Bank of Israel's recent rate cuts. But unless the shekel further strengthens, "a further significant addition of stimulus does not appear necessary," the board said.
In the past three years, Israel's economy has expanded at rates from 4% to 6%, with inflation-adjusted growth in gross domestic product estimated at 5% for 2006, the agency's executive board said.
The country's current-account surplus continued to widen in 2006, to 5% of GDP, the IMF estimated.
A strong shekel has put consumer inflation below the Bank of Israel's target range of 1% to 3% and has prompted the central bank to reduce its benchmark interest rate to 4.5%.
The shekel ended 2005 at 4.603 to the US dollar but has since strengthened more than 8% to the Bank of Israel's representative rate on Tuesday of 4.221.
Tight spending controls shrank the government budget deficit to 0.9% of GDP in 2006, despite unexpected spending related to the country's five-week summer war with Hizbullah, the IMF said.
For 2007, the budget deficit "is expected to widen" due to war-related spending and to "moderating" revenue growth, but the gap "is targeted not to exceed 2.9% of GDP," the IMF said.
The agency called on the Israeli government to keep inflation-adjusted spending growth "at or below the 1.7% ceiling, and debt reduction should be given priority over tax cuts." Despite the stronger estimates, key risks persist, the IMF said, citing the prospect that global current-account imbalances could change, investors may switch their funds to less-risky markets, and unspecified "geopolitical uncertainties" have to be factored in.
The IMF board also "identified the need to further strengthen the economy's resilience to shocks, particularly through public-debt reduction, as the key challenge facing" Israel's policy makers.