Bank of Israel to hold rates this week but cut possible in February - Reuters Poll

By Steven Scheer

JERUSALEM (Reuters) - The Bank of Israel is expected to leave short-term interest rates unchanged for an eighth straight policy meeting this week, although analysts believe a rate cut at the subsequent meeting in late February is possible should inflation pressures ease.

Of the 13 economists polled by Reuters, 12 said they expected the central bank to keep its benchmark rate at 4.5% when the decision is announced on Monday at 4 p.m. (1400 GMT). One predicted a quarter-point reduction to 4.25%.

Driven largely by supply issues, Israel's annual inflation rate had accelerated to a 10-month high of 3.6% in August but it has since eased to a four-month low of 3.4% in November.

That trend looks to reverse itself somewhat, particularly in January after a host of costs rose - including a 1 point rise in the value added tax (VAT) to 18%, increases in other taxes, and rises in electricity, water and food prices that will bring the inflation rate close to 4%.

"We are some way from the next cut, as the Bank of Israel will likely require conclusive evidence of inflation moderating before a cutting cycle recommences," said Goldman Sachs economist Johan Allen.

But after January, inflation expectations are expected to drop and may allow the central bank to ease its policy rate.

"In the second half of February break-even inflation will fall," said Bank Hapoalim chief economist Victor Bahar.

"I would say there are high chances" of a rate cut at the Feb. 24 meeting, he said.

In keeping rates steady on Nov. 25, the central bank had cited high inflation while military conflicts were keeping economic growth weak.

Israel has since forged a ceasefire with Hezbollah in Lebanon, while its war in Gaza following the Oct. 7, 2023 attacks by Palestinian Islamist group Hamas has become far less intense despite 100 hostages remaining held in Gaza.

The Houthis have fired missiles almost daily from Yemen but overall, Israel's risk premium - a key concern in the Bank of Israel - has improved significantly and the shekel has also gained against the dollar the past few months.

It might still be too early for a rate cut, said Yonie Fanning, chief strategist at Mizrahi Tefahot Bank.

"The way it seems right now, holding off for another month and a half seems like a better idea," Fanning said. "The larger risk for a central bank is to lose control over prices."

He noted that keeping rates high will not impact the supply side or the competitive level at the business sector that are currently pushing prices upwards. "But they will tame consumer demand, and eventually anchor inflation," he said.

In addition to the rates decision, the central bank will also publish updated 2025 economic estimates, while governor Amir Yaron will hold a news conference at 4.15 pm on Monday.

The bank's economists currently estimate economic growth of 3.8% in 2025 and inflation at a 2.8% rate, within the government's 1-3% annual target.

(Reporting by Steven Scheer; Editing by Tomasz Janowski)