December 26, 2016 / 3:19 PM / 8 months ago

UPDATE 1-Bank of Israel holds main interest rate, raises growth forecasts

(Adds central bank governor comments, updated growth estimates, shekel reaction)

By Steven Scheer and Ari Rabinovitch

JERUSALEM, Dec 26 (Reuters) - The Bank of Israel raised its forecasts for economic growth on Monday, after holding its benchmark interest rate steady at 0.1 percent for the 22nd month in a row.

All 10 economists polled by Reuters had forecast no change by the central bank, which is expected to keep rates steady until late in 2017.

"The economy continues to grow at a solid pace and the labour market is strong, while the inflation environment remains very low," Bank of Israel Governor Karnit Flug told a news conference.

Israel has been mired in deflation for more than two years, with the annual rate of price moves holding steady at -0.3 percent in November despite the dissipation of energy price declines.

In updated estimates, the bank said it expected annual inflation to reach 1 percent late next year, moving back to within the government's annual target range of 1-3 percent. It sees a 1.5 percent inflation rate in 2018.

The central bank raised its economic growth estimate to 3.5 percent in 2016 from 2.8 percent previously, citing upward revisions to growth in the first half and higher than expected third-quarter growth of an annualised 3.2 percent.

It raised its forecast for growth next year 2017 to 3.2 percent from 3.1 percent and predicted a 3.1 percent expansion for 2018, with the economy expected to be more reliant on exports the next two years and less on consumer spending.

The bank's own economists predict policymakers will leave the benchmark interest rate at 0.1 percent until the third quarter of 2017 and then raise it to 0.25 percent by the end of next year and to 0.5 percent in 2018.

Flug noted that the bank would not necessarily follow interest rate increases by the U.S. Federal Reserve, especially since the European Central Bank is expected to stick to very expansionary policies.

The central bank's "policy of foreign exchange purchases will continue, as necessary, to support the attainment of policy goals," Flug said.

The bank's reserves have reached more than $97 billion and are moving towards the upper end of its $70-$110 billion target range. Flug noted that the bank would hold back on buying foreign currency should reserves hit $110 billion.

Israel's shekel was steady at 3.815 per dollar after the rate announcement. It has gained 1.3 percent since the last rates decision, while appreciating by 2 percent versus a basket of currencies of major trading partners.

Over the past 12 months, the shekel has appreciated 5.6 percent against the currency basket.

Starting in 2017, the central bank will decide on interest rates eight times a year from the current 12. (Editing by Hugh Lawson)

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