Traders doubled bets on Israeli interest rate cuts in the past two weeks, speculating the central bank will act to insulate the economy from a global slump as inflation slowed to a one-year low. The Bank of Israel may lower the 2.75 percent key rate by 40 basis points over the next 12 months, compared with 21 basis points of cuts priced in on Dec. 8, according to interest-rate swaps, an indicator of investor expectations. Policy makers review borrowing costs today, with 12 out of of 20 economists surveyed by Bloomberg forecasting a 25 basis-point reduction.“Traders expect the Bank of Israel to act fast and lower rates in coming months before the crisis in Europe, which is expected to further ease local exports and private consumption, deteriorates,” Modi Shafrir, chief economist at Tel Aviv-based I.L.S. Brokers Ltd., said by telephone. “The central bank has the ammunition to boost growth as inflation has slowed.”Israeli economic growth has been slowing this year as the debt crisis in Europe, one of the nation’s biggest trading partners, crimps demand for exports such as electronic components. Overseas shipments account for almost 40 percent of Israel’s gross domestic product and the threat of a worsening global slowdown spurred the central bank to cut rates twice in the past three months, joining emerging-market policy makers from Brazil to Indonesia in easing access to funding.The trade deficit widened in November to a seasonally adjusted $1.64 billion from $1.45 billion the previous month, the statistics office said Dec. 12. It had widened to $1.78 billion in May, the most in at least 16 years, as exports fell. Room to Cut A greater-than-expected slowdown in inflation is giving Governor Stanley Fischer more room to lower borrowing costs. Consumer prices rose 2.6 percent in November from a year earlier, Israel’s Central Bureau of Statistics said Dec. 15. Economists had predicted a rate of 2.8 percent, according to the median 10 estimates in a Bloomberg survey.Before the announcement, 11 out of 15 economists surveyed said the central bank would leave the benchmark interest rate unchanged and four forecast a reduction. “Core inflation was down, housing prices were down, it was a trend-setting kind of thing,” said Jonathan Katz, a Jerusalem based economist for HSBC Holdings Plc. “I thought Fischer would be on pause. But now I think he could cut.”The two-year breakeven rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, has fallen from a high of 357 on May 2 to a low of 157 on Sept. 15. The rate implied inflation of 1.94 percent on Dec. 25. Worsening Global Outlook Economists’ 12-month inflation expectations declined to 2.2 percent from 2.3 percent a month earlier, the central bank reported Dec. 19. The government’s target range for inflation is 1 percent to 3 percent. The central bank last cut its benchmark lending rate in November, lowering it by a quarter point. While Israel passed through the 2008-2009 crisis in “reasonable shape,” the economy is now being affected by the worsening global outlook and the Bank of Israel was justified in switching to a loosening monetary stance, the OECD said Dec. 12. The Bank of Israel will probably lower its growth forecast of 3.2 percent for 2012 as the European crisis weighs on the global economy, Fischer said Dec. 7. The bank’s new growth prediction will probably be “around” the Organization for Economic Cooperation and Development’s 2.9 percent forecast, he said. The Central Bureau of Statistics said on Nov. 16 economic growth eased to an annualized 3.4 percent in the third quarter from a revised 3.5 percent in the previous three months.