A lower than expected Israeli inflation reading will still not allow the central bank to resume its rate cutting cycle anytime soon with policy makers constrained by Israel’s war against Hamas, analysts said.

May inflation came in steady at 2.8 per cent, well below a Reuters consensus of 3.2 per cent, taking markets by surprise, but some analysts remain entrenched in their views that it is not the time for the Bank of Israel to deliver more cuts.

The inflation rate is now within the 1 per cent-3 per cent annual target and the global backdrop is one of easing policy, with many central banks in emerging economies well down the easing path and major peers, bar the US Federal Reserve, headed the same way.

“If a war was not going on with elevated geopolitical risks, one could make a case for monetary loosening,” said Jonathan Katz, chief economist at Leader Capital Markets.

“Elevated risk is the overriding monetary consideration at the moment,” he said. “Clearly, if a ceasefire is reached … this (May) CPI print would provide support for the doves on the (monetary) committee.”

The war with Hamas is now in its ninth month and shows little signs of ending, while tensions have intensified on the northern border with Hezbollah in Lebanon to keep Israel’s risk premium high – a key focus for the Bank of Israel since the war began in October.

While dollar-shekel has been largely steady, spreads between Israel dollar denominated bonds and US government bonds have widened in recent weeks.

The BOI lowered its benchmark interest rate in January (ILINR=ECI) by 25 basis points to 4.5 per cent following 10 straight aggressive rate increases. The next decisions are due on July 8 and Aug. 28.

The central bank has cautioned the easing cycle will be far more gradual than the front-loaded hikes that took the key rate from 0.1 per cent to 4.75 per cent in less than two years in 2022 and 2023.


Sticky inflation, bond market expectations of an inflation rate of 3.1 per cent in a year’s time and geopolitical risks had already prompted some analysts to push their expectations for rate cuts further out.

JPMorgan now predicts one 25 basis point cut in the third quarter, compared to three cuts of that magnitude it expected to see a month ago. Goldman Sachs projects 25 bps cuts in both the third and the fourth quarter – although it concedes the timing is hard to call with the level of uncertainty.

“We maintain a relatively dovish view on the medium-term outlook for Israeli inflation and rates as we think more favourable CPI prints in the coming months and a reduction in shekel volatility will enable the BOI to restart its cutting cycle in Q3 at the pace of 25 bps a quarter,” it said.

Others are less optimistic, with those with such dovish views in the minority of the forecasts seen by Reuters.

“We expect the BOI to err on the side of caution and not offer any more rate cuts this year,” said Brahim Razgallah at Barclays.

The central bank and private economists had initially forecast about 1 percentage point of cuts in 2024.

Mizrahi Tefahot chief strategist Yonie Fanning, said markets seem to have 1.5 rate cuts priced in over the next year – a figure unchanged by May’s inflation reading.

BOI Governor Amir Yaron told Reuters after the last rates decision on May 27 that rates could not decline as long as inflation pressures persisted and Israel’s war against Hamas remained uncertain, driving up government spending.

One issue for investors as well as the central bank and economists is the CPI itself. The April index was higher than expected largely due a nearly 20 per cent rise in notoriously volatile international air fares, while the same item fell 15 per cent in May to shave off 0.4 points.

“The surprise in May’s CPI (does not) signal a shift in the inflation environment but rather more ‘noise’ around flight prices,” said Bank Hapoalim Chief Economist Victor Bahar, who also cited higher wages and an expansion of the government’s budget deficit as adding to price pressures.

As such, “the interest rate will not decrease before the US Fed lowers rates”, he said.