The OECD expects Israel's economy to grow 5.4 percent in 2011 before slowing to 4.7 percent in 2012 due to rising labor-supply constraints and more interest rate hikes. In November, it had penciled in growth nearer four percent for this year.
It said recent political developments in the region were a risk to the economy. The report also said fiscal goals would probably be achieved.
Annual inflation will remain above the central bank's target band until the beginning of 2012, while underlying consumer price inflation is projected to edge up.
To stem inflationary pressure, the OECD said the policy rate should rise to 4.75 percent this year, from 3.25 percent now, and by a further 75 basis points in 2012.
It said increases may be smaller if the shekel firms but that partly depends on whether currency intervention continues.
"The continued efforts to curb currency appreciation reflect a strategy that is less single-mindedly focused on hitting the inflation target," it said.
The OECD said some of the currency measures were increasingly at odds with the pace of economic recovery and authorities should return to a "straightforward" policy if export growth looks strong.
- Follow Ynetnews on Facebook