Israel Q2 GDP revised down but rising inflation to keep cenbank on sidelines

By Steven Scheer

JERUSALEM, Sept 16 (Reuters) - Israel's economy grew more slowly in the second quarter than previously thought, data showed on Monday, as the war in Gaza against the Palestinian Islamist group Hamas continued to take a toll on growth, while creating inflationary pressures.

Despite sputtering growth, the Bank of Israel is in no position to lower interest rates due to rising prices, a tight labour market and an expansionary fiscal policy as the government boosts spending to fund the 11-month-old war.

Unlike in the U.S. and the European Union, analysts say that Israeli data points to interest rate cuts being pushed further back.

"A higher inflation path, alongside high uncertainty in geopolitics and the budget adds risks that monetary easing may be postponed to the second half of 2025," said Barclays economist Zalina Alborova.

Gross domestic product rose by an annualised 0.7% in the April-June period, the Central Bureau of Statistics said in its second estimate, down from an initial 1.2% reported a month ago.

The economy was supported by gains in consumer and state spending and in investment in fixed assets while exports fell.

First-quarter GDP growth was revised down slightly to 17.2% from a prior 17.3%, as the economy bounced back from a steep contraction in the fourth quarter of 2023 when the war began.

This followed data issued on Sunday showing the annual inflation rate rose to 3.6% in August, above market expectations of 3.2% and far exceeding the government's 1% to 3% target rate.

The bureau also said Israel's jobless rate remained tight at 2.6% in August.

After leaving the benchmark interest rate at 4.5% for a fifth straight time on Aug. 28, central bank officials said it was unlikely there would be a rate cut until next year.

Much of the spike in inflation stemmed from supply disruptions, with travel abroad and fresh vegetables - particularly tomatoes - up sharply, along with a gain in housing costs.

"We don't think this will be of much comfort to the Bank of Israel," said Citi economist Michel Nies, who believes that should supply-driven price shocks continue to push inflation higher "then questions will soon emerge whether the next move in the policy rate is still downward."

(Reporting by Steven Scheer Editing by Gareth Jones and Sharon Singleton)