By Steven Scheer

JERUSALEM (Reuters) -The Bank of Israel held short-term interest rates steady on Monday for the third straight meeting, citing rising price pressures, a rebound in economic activity and continued geopolitical uncertainty resulting from Israel’s war with Hamas in Gaza.

The central bank kept its benchmark rate at 4.50%. It had lowered the rate by 25 basis points in January after inflation eased and economic growth was hit by the war, but kept policy steady in February and April.

Governor Amir Yaron indicated it would be difficult to lower rates further as long as inflation pressures persist and the war remains uncertain and drives up government spending.

“All these parameters are putting more of a burden on the process of interest rate normalisation because we are determined to not allow inflation to diverge,” Yaron told Reuters.

The rate cut process “is going to be very cautious and very measured.”

All 15 analysts polled by Reuters had expected no change in rates on Monday and many economists believe the rate could stay put for the rest of 2024.

“There has been some increase in the inflation environment,” the central bank said in a statement. “Inflation expectations… for the coming year increased, and are around the upper bound of the target range.”

It noted that economic activity and the labour market continue to recover gradually, while continued geopolitical uncertainty is reflected in the economy’s high risk premium.

“In view of the war, the monetary (policy) committee’s policy is focusing on stabilizing the markets and reducing uncertainty, alongside price stability and supporting economic activity,” the bank said.

The shekel was flat versus the dollar at 3.675, having strengthened from 3.83 to the dollar a month ago due to expectations of a delay in the monetary easing cycle.

The Bank of Israel reiterated that the interest rate path will be determined by future inflation, and continued stability in the financial markets, economic activity and fiscal policy.

When the bank cut rates in January, policymakers had believed the easing cycle would be gradual and result in cuts of up to one percentage point in 2024, but inflation has remained stubborn.

Morgan Stanley economist Alina Slyusarchuk said a 25 basis point rate cut could come in November with another 100 basis points in 2025. “The risks to our call are skewed to a delay, with the chance the cutting cycle would resume in 2025 only,” she said.

Israel’s annual inflation rate rose to 2.8% in April, still within the bank’s target range of 1-3%, after reaching 2.5% in February. Despite a rise in living costs and higher mortgage and other loan rates that make it tough for many households to make ends meet, the economy grew an annualised 14.1% in the first quarter from the prior three months after shrinking in the fourth quarter after the war broke out on Oct. 7.

(Reporting by Steven Scheer and Ari Rabinovitch; Editing by Toby Chopra and Susan Fenton)

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