Bank of Israel stays cautiously optimistic on inflation, rates outlook

By Steven Scheer

JERUSALEM (Reuters) - Bank of Israel policymakers are cautiously optimistic that inflation will ease later in 2025 in the wake of uncertainty stemming from the effects of Israel's war against Palestinian militant group Hamas in Gaza.

In minutes of the February 24 rates decision, all five members of the central bank's monetary policy committee voted to leave the benchmark interest rate at 4.50% for a ninth straight meeting, minutes of the discussion showed on Monday.

In leaving rates unchanged, the bank had cited an inflation rate rising to 3.8% in January from 3.2% in December, staying well above its 1-3% annual target range.

The central bank blamed factors such as tax increases for the spike, and it estimates that inflation may move back below 3% in the second half of the year.

However, the minutes also showed the committee's assessment that there were "several risks for a possible acceleration of inflation or for its not entering the target range — the geopolitical developments and their impacts on economic activity, prolonged supply constraints, shekel volatility, and fiscal developments".

It added that the labour market remains tight, with a jobless rate at 2.8% in January, lower than its pre-war level, while the number of those temporarily absent from work due to military reserve duty continues to decline. Nominal wages have also grown 6.8% since September 2023.

Still, Bank of Israel Governor Amir Yaron has said Israel could cut rates once or twice later this year should inflation move back into its target.

"The interest rate path will be determined in

accordance with the convergence of inflation to its target, continued stability in the financial markets, economic activity, and fiscal policy," the minutes said.

Policymakers, it added, were focused on stabilising markets and reducing uncertainty in addition to maintaining price stability and supporting economic activity, even as the shekel has appreciated against the dollar and Israel's risk premium has fallen.

Committee members also discussed economic ramifications of the war on the economy, which has been recovering at a moderate pace.

Official data on Monday showed fourth-quarter economic growth was revised to a 2.0% annual rate from 2.5% in a preliminary estimate last month. For all of 2024, growth was revised down to 0.9% from 1.0%, although per capita GDP dipped 0.4% last year.

The central bank forecasts 4% growth in 2025. The next rates decision is slated for April 7.

(Reporting by Steven Scheer; Editing by Toby Chopra, Aidan Lewis)