The Bank of Israel building is seen in Jerusalem June 16, 2020. REUTERS/Ronen Zvulun

By Steven Scheer

JERUSALEM (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 following the ceasefire in Gaza while expressing caution over the prospect of future cuts.

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.

"The Monetary Committee’s policy is focusing on price stability, support for economic activity, and stability of the markets," the central bank said in a statement.

"The interest rate path will be determined in accordance with the development of inflation, economic activity, geopolitical uncertainty, and fiscal developments," it said.

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."

It added that the labour market remains tight and wage pressures continue to rise while home prices are declining.

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.

"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 on the bank to 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)