Bank of Israel cuts rates for first time since January 2024, future cuts to be gradual

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Benchmark rate cut to 4.25% from 4.5%

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Rate cut follows global trend and U.S.-brokered Gaza ceasefire

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Inflation steady at 2.5%, within target range

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Governor: Future cuts will be very gradual due to economic risks

(Adds governor's comments in paragraphs 3-6)

By Steven Scheer

JERUSALEM, Nov 24 (Reuters) - The Bank of Israel cut interest rates by a quarter-point on Monday, its first reduction in nearly two years, citing a moderation in inflation leading up to the ceasefire in Gaza and said cuts will be very gradual over the next year.

The cut in the benchmark rate to 4.25% from 4.5%, widely expected by analysts and financial markets, came after other global central banks had already begun to ease monetary policy and last month's U.S.-brokered truce between Israel and Palestinian militant group Hamas took hold.

Bank of Israel Governor Amir Yaron told Reuters that economic conditions - mainly improved inflation data - had allowed for a rate reduction but cautioned that geopolitical risks remained, the labour market is tight, wages are rising and consumer demand is strong.

Israel, and the world as a whole, is not going back to a zero rates environment, he said, pointing to the central bank's own forecast that the key rate would reach 3.75% by September 2026.

"That is a still reasonable rate environment for the way we are seeing ... the ability of the economy right now to operate," Yaron said, adding that moving gradually would give policymakers the ability to monitor demand "in a way that won't require us to change course."

He said that historically, countries face high inflation during wartime, hence the need to be cautious.

The committee lowered the key rate by a quarter-point in January 2024 at the outset of the Gaza war but has taken a conservative stance since then, opting for caution during the two-year conflict while price pressures rose, largely due to supply constraints.

But Israel's inflation rate has eased, and held steady at 2.5% in October to stay within an official 1-3% annual target range.

The central bank acknowledged inflation has moderated in the past two months but that "forecasters project that there will be some increase in inflation at the end of the year, and that it will then decline and stabilize around the midpoint of the target range."

At the same time, the Bank of Israel pointed to a sharp rebound in economic activity in the third quarter, gaining an annualised 12.4%, but that "its level remains lower than its long-term trend."

Since the prior rates decision in late September, the shekel also has appreciated versus the dollar, euro and other trading partners, it said.

"The data from recent months have... created a clear need for a cut," said Ron Tomer, president of the Manufacturers' Association.

"The Bank of Israel's decision to lower the interest rate is a responsible step that helps curb the appreciation and restore competitiveness to the economy," said Tomer, who called for a cut again before its next meeting in early January.

The October 10 ceasefire in the two-year Gaza war has eased the conflict and, although looking

increasingly fragile, has for now reduced geopolitical risk and eased price pressures.

"Today's interest rate cut joins a series of steps and clear signs - Israel is on the path to tremendous economic growth," said Finance Minister Bezalel Smotrich. (Reporting by Steven Scheer; Editing by Toby Chopra and Deepa Babington)