Bank of Israel holds rates as war fuels inflation but weighs on growth

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Central bank focuses on stabilizing markets amid continuing war

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Analysts expect rates to remain unchanged until mid-2025

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Geopolitical uncertainty impacts economic growth and risk premium

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By Steven Scheer

JERUSALEM, Nov 25 (Reuters) - The Bank of Israel left interest rates unchanged for the seventh straight meeting on Monday, saying inflation remains high but that military conflicts are keeping economic growth weak.

In its final decision of 2024, the central bank - also concerned about Israel's investor risk premium which has risen since the war began on Oct. 7, 2023 - left its benchmark rate at 4.50%.

"In view of the continuing war, the Monetary Committee's policy is focused on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity," the central bank said in a statement.

It said the interest rate path will be determined by inflation moving back into the government's 1-3% annual target, continued stability in financial markets, economic activity, and fiscal policy.

All 13 analysts polled by Reuters had expected no rates move on Monday and widely expect rates to remain on hold until mid-2025, in contrast to rate cuts in the U.S. and in Europe.

The Bank of Israel had reduced the key rate by 25 basis points in January after inflation eased and economic growth slowed amid the Gaza war, but kept policy steady in February, April, May, July, August and October.

Israel's annual inflation held at a rate of 3.5% in October, remaining above the target range, after falling as low as 2.5% in February and hitting a 3.6% peak in August. In October central bankers warned of rate increases should inflation - mainly caused by war-related supply issues - stay lofty.

The central bank noted that the inflation rate looks to rise in the coming months before easing again in the next year. It added that the labour market - with a jobless rate at 2.5% in October - remains relatively tight.

The economy rebounded somewhat in the third quarter after near zero growth in the prior three months, expanding an annualised 3.8%. But the Bank of Israel said supply constraints due to the conflicts against Hamas militants in Gaza and Hezbollah in Lebanon were suppressing growth.

"The continuing geopolitical uncertainty continues to pose difficulties for economic activity and is delaying the economy's return to the level of activity that characterized it prior to the war," it said.

"The most recent indicators of economic activity provide a mixed picture regarding the fourth quarter, with a slight tendency to weakening."

It also said that Israel's risk premium, as measured by the CDS spread, has declined significantly since the last decision on Oct. 9 "although it remains very high relative to the prewar period". (Reporting by Steven Scheer; Editing by Toby Chopra, William Maclean)