Karnit Flug
Bank of Israel governor Karnit Flug holds up a newly designed 50 shekel banknoteReuters

The recent shift to slight deflation in Israel is not a major concern as the trend is not the result of weakening consumer demand, according to a senior official at the Israeli central bank.

Israeli consumer prices fell 0.3% compared with a year earlier in September, the first such drop in seven years, as energy and food prices dropped.

The government has set an annual target of between 1% and 3% but the bank said the fall in prices did not represent weak demand in the economy, rather signalling the declining price of imports.

"The low level of inflation slightly differs from the deflation we are seeing in parts of Europe. Part of the low level of inflation is due to the fact that we are importing lower prices from abroad – oil, food and commodities – and this does not have a negative impact on the economy," the bank's deputy governor Nadine Baudot-Trajtenberg told Reuters news agency.

The Bank of Israel slashed its benchmark interest rate to a historic low of 0.25% in August but maintained the level at its September meeting, despite pressure to reduce the rate further.

The bank's monetary policy committee has previously cut interest rates and bought foreign currency in a bid to stimulate economic growth in Israel, which has fallen to its slowest level since the global financial crisis of 2009.

"It's not just the low inflation. Part of the reduction of prices is a very good thing in the economy ... Not all deflation is due to poor or depressed demand," Baudot-Trajtenberg said.

Looking ahead, the deputy governor said she did not expect to see deflation over the coming year.