By Ed Frankl


Israel's central bank has kept its interest rate unchanged but signaled possible easing ahead if inflation continues to fall and financial markets stabilize further, as the country's military conflict with Hamas continues.

"Insofar as the recent stability in the financial markets becomes entrenched and the inflation environment continues to moderate toward the target range, monetary policy will be able to focus more on supporting economic activity," the Bank of Israel said on Monday.

However, the path of future interest rates with be determined by the nature of the war and the uncertainty derived from it, the bank said, after it held rates for the fourth-straight meeting.

The messaging was the first real hint that an easing cycle could be on the cards early next year if the conditions are right, according to Liam Peach, senior emerging markets economist at Capital Economics.

"We still expect inflation risks to remain high in the near term and we maintain our forecast for the central bank to wait until April before starting an easing cycle, but there is now a growing possibility of a rate cut in the first quarter," he added.

Still, economic indicators during the war point to an initial contraction of business activity, with some recent gradual recovery, according to the bank.

"The war is having significant economic consequences, both on real activity and on the financial markets," it said.

While inflation has moderated in the country--falling to 3.7% in October--it is still above the bank's 1%-3% target, though inflation expectations and forecasts are within the range.

The bank also lowered its growth forecast for the economy, expecting gross domestic product to grow 2% in both 2023 and 2024, from 2.3% in 2023 and 2.8% in 2024 under prior forecasts. However, that forecast includes a high level of uncertainty, with the assessment that the government will spend around 160 billion shekels ($42.83 billion) on the war by the end of 2025.

Israel launched its military campaign in response to the killing of 1,200 people, mostly Israeli civilians, in a Hamas raid on Oct. 7. Almost 15,000 Palestinians have been killed in Gaza, according to authorities in the Hamas-run enclave.


Write to Ed Frankl at edward.frankl@wsj.com


(END) Dow Jones Newswires

11-27-23 1019ET