By Steven Scheer

JERUSALEM, Nov 23 (Reuters) - Rising inflation expectations as the economy continues to recover from a recession led the Bank of Israel to raise short-term borrowing costs for the second time in three months on Monday.
The central bank increased its key lending rate by a quarter-point to 1 percent -- a level it said was still "accommodative" and would support further economic recovery.
A Reuters poll last week had found that nine of 15 economists had expected no rate move. Six forecast a quarter-point increase.
A central bank source told Reuters that the rate rise was mainly due to rising inflation expectations that are nearing 3 percent but the action did not necessarily signal a series of rate hikes to come.
"The rise in inflation expectations is what led to the rise in the interest rate. There doesn't appear to be a substantive change in the policy of raising rates gradually," said Rafael Gozlan, an economic strategist at Leader Capital Markets, who forecasts no move at the next policy meeting on Dec. 28.
The Bank of Israel was the first major central bank to raise short-term rates since last year's financial crisis when it increased the key rate by a quarter-point to 0.75 percent in August.
It noted that Australia and Norway had already increased rates while other large central banks have started implementing steps "that point to a gradual exit from the non-conventional aspects of monetary policy".
Bank of Israel Governor Stanley Fischer opted to hold rates in September and October, citing easing inflation expectations and uncertainty regarding the strength of the economic recovery.
Some economists believe Fischer should have raised rates again the past couple months since inflation and growth were well above other countries with an interest rate of 0.75 percent.
"The interest rate level was not appropriate for the rate of growth and inflation. Even one percent is still low," said Vered Dar, chief economist at the Psagot brokerage.

In raising rates on Monday, the Bank of Israel said inflation expectations in the bond market for the next 12 months rose to 2.5 percent in the last few days from 2.2 percent. It noted that annual inflation was 2.9 percent in October -- at the top of an official 1-3 percent target -- and is expected to top 3 percent in coming months.
"One-year-forward inflation expectations increased moderately last month, and are in the upper part of the target range, even though they incorporate expectations of increases in the interest rate in the course of the next year," it said, attributing some of the increase to state-imposed tax hikes.
"The decision to increase the interest rate ... will help to establish inflation one year ahead firmly within the target range, after the effects of the non-recurring government initiated price increases have passed," the central bank added.
Interest rate expectations are for the key rate to reach 2.3 to 2.6 percent in the coming 12 months, the Bank of Israel said.
The shekel appreciated to 3.775 per dollar from 3.79 just prior to the rate increase.
The rate hike came a week after data showed Israel's economy grew an annualised 2.2 percent in the third quarter after a 1 percent growth in the April-June period -- a report that some analysts said was strong while others thought it was weak.
Growth was led by sharp gains in exports and consumer spending.
Economic "figures for the third quarter strengthen the assessment that Israel's economy is recovering from the crisis, and that the renewed growth is becoming more firmly established," the Bank of Israel said.
"The growth expresses significant recovery in all components of demand."
For full Bank of Israel statement please click on:

http://www.bankisrael.gov.il/press/eng/091123/091123b.htm
(Additional reporting by Tova Cohen in Tel Aviv; Editing by Ron Askew) Keywords: ISRAEL RATES/

(steven.scheer@thomsonreuters.com; +972 2 632 2210; Reuters Messaging: steven.scheer.reuters.com@reuters.net)

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