Israel rate cuts off the table as war drags on; Iran’s new president wants to revive nuke talks

Masoud Pezeshkian, a 69-year-old heart surgeon who wants to restart talks with the US over the landmark nuclear deal, was voted president of Iran after an election that underscored major challenges facing the country at home and abroad.

Hamas has dropped its objections over a US-backed ceasefire proposal to halt the Gaza conflict with Israel, a person familiar with the matter said, the clearest sign yet that a truce was possible after months of fruitless negotiations.

Israeli rate cuts off the table as war complicates next move

Israel’s central bank was set to hold interest rates for a fourth consecutive time, a pause likely to stretch for several months amid fears that fighting against regional militant groups Hamas and Hezbollah could escalate.

Economists surveyed by Bloomberg were unanimous that the monetary committee would keep its benchmark at 4.5%, where it’s been since a quarter-point cut to start the year.

Alongside its decision on Monday, the central bank will publish fresh economic forecasts and could revise an outlook from April that showed the key rate at 3.75% in the first quarter of 2025.

“We expect the Bank of Israel to err on the side of caution and not offer any more rate cuts this year,” said Barclays economists including Zalina Alborova. “Even in a scenario of geopolitical improvement, inflation pressure is likely to prevent the bank from delivering a cut.”

With Israel’s war against Hamas now in its 10th month, risks are growing of an all-out conflict with Iran-backed Hezbollah in Lebanon. While talks on a ceasefire deal in Gaza have resumed, Prime Minister Benjamin Netanyahu’s government is preparing for the possibility of a full-on war with Hezbollah militants in Lebanon.

How the security crisis develops will matter for the central bank, whose assessment since the beginning of the war in October has been that the conflict’s economic impact will gradually decrease as the year unfolds.

“If this assumption changes to a more severe scenario, that would probably wipe out the possibility of an interest rate cut,” said Ronen Menachem, chief markets economist at Bank Mizrahi Tefahot.

The turmoil is spilling over into markets, with the yield on the government’s 10-year shekel bonds reaching a 13-year high of 5.2% this month. The shekel is down by close to 4% against the dollar since the start of March, one of the worst performers among a basket of 31 major currencies tracked by Bloomberg.

An escalation of hostilities across the northern border with Lebanon threatens further depreciation of the shekel, supply disruptions and a greater fiscal burden, all of which would intensify inflationary pressures.

Government spending has already soared because of the war. Israel is on track to run one of its widest budget deficits this century with a shortfall the government estimates will reach 6.6% of gross domestic product in 2024.

Annual price growth is now at 2.8% — within the official target range but on track to exceed its 3% upper limit. Bank Hapoalim sees inflation at 3.3% over the next 12 months and Leader Capital Markets expects it at up to 3.4%, depending on the shekel’s value against the dollar.

Iran elects president who wants to revive nuclear talks with West 

Masoud Pezeshkian, a 69-year-old heart surgeon who wants to restart talks with the US over the landmark nuclear deal, was voted president of Iran after an election that underscored major challenges facing the country at home and abroad.

Pezeshkian beat hard-line Islamist Saeed Jalili (58) by almost three million votes in a runoff where the turnout of 49.8% was only marginally better than last week’s first round, according to officials.

It was among the lowest ever recorded for a presidential vote in Iran, highlighting the malaise and distrust in the political system overseen by Supreme Leader Ayatollah Ali Khamenei. The US State Department called the low turnout a result of elections that were “not free or fair”.

As a reformist, Pezeshkian will be widely expected to seek improved relations with the West with a view to removing sanctions that have long held back the economy. He’ll also look to improve living standards for millions of middle-class Iranians who have been pushed into poverty, in part due to chronic mismanagement of state finances.

“I haven’t made any false promises to you. I haven’t said anything that I won’t be able to act on or that will later amount to a lie,” Pezeshkian said in a victory speech at the mausoleum of Ayatollah Ruhollah Khomeini on Saturday night and shown on state TV.

“The competition is over,” he said, addressing Jalili. “The time has come for friendship for Iran.”

But his ability to affect meaningful change will be restricted by a political system dominated by hard-line institutions in which ultimate power rests with Khamenei.

“His victory certainly offers an opening for the West,” said Ali Vaez, director of the Iran Project at the Washington-based International Crisis Group. “Any future talks will be tough because even if the barriers of misunderstanding have been lowered, the walls of mistrust remain high.”

One of Pezeshkian’s key pledges is to revive a landmark 2015 nuclear deal that was brokered between Iran and world powers, including the US. The agreement lifted sanctions on the Islamic Republic in exchange for strict limits and close regulation of its atomic activities.

The accord was left in tatters when then-US President Donald Trump withdrew in 2018, instigating a more comprehensive sanctions regime on Iran that remains in place. And with Trump challenging Joe Biden in November’s US presidential election, his “maximum pressure” policy against the Islamic Republic could return.

“It is hard to make any serious progress before the US elections in November,” Vaez said. “But the West now has a viable interlocutor in Tehran.”

A US State Department spokesperson said that the elections would not have a significant impact on its approach to Iran, though the US remained “committed” to diplomacy when it advances American interests.

“We have no expectation these elections will lead to fundamental change in Iran’s direction or more respect for the human rights of its citizens,” the spokesperson said in a statement. “As the candidates themselves have said, Iranian policy is set by the Supreme Leader.”

Pezeshkian’s other challenges include the handling of Iran’s conflict with Israel, which has reached perilous levels in recent months. The two countries almost went to war after trading missiles in April, and tensions remain high due to the ongoing war in Gaza between Israel and Hamas, which is backed by Iran, and Lebanon-based Hezbollah, another allied militia.

Iran has seen large, violent protests in recent years against the religious establishment and Khamenei, leading to more suppressive measures against political dissent, while moderate and reformist voices have been marginalised from politics.

That’s what makes Pezeshkian’s election both surprising and potentially fragile. He was the only reformist candidate on a ballot of hard-liners and his election underscores how little enthusiasm there is for the ultra-conservative and often radical views that dominate Iran’s state institutions, including the powerful Islamic Revolutionary Guard Corps.

Hamas drops ceasefire objections as talks set to continue

Hamas has dropped its objections over a US-backed ceasefire proposal to halt the Gaza conflict with Israel, a person familiar with the matter said, the clearest sign yet that a truce was possible after months of fruitless negotiations.

The person, who asked not to be identified discussing private deliberations, said that Israel had come back with fresh changes in the latest round of indirect talks, suggesting that tough negotiations remained. Discussions would continue next week, said Israel.

“It should be emphasised that there are still gaps between the sides,” the office of Israel Prime Minister Benjamin Netanyahu said in a statement.

Hamas, which is designated a terrorist group by the US and the UK, has agreed to move beyond earlier sticking points, the person said, without providing details. The Jerusalem Post reported earlier on Friday that Hamas appeared to have dropped a demand that Israel agree to a permanent ceasefire at the start of the proposed deal, while Israel’s Channel 13 said the new offer did not insist on a full withdrawal of Israeli troops in the initial stage.

Either way, the apparent shift from Hamas offered the best hope in weeks that the two sides could at least temporarily halt fighting that was touched off with the group’s attack on southern Israel on 7 October. Israel’s retaliatory military campaign has killed more than 37,000 Palestinians, according to the Hamas-run health authority in Gaza, and threatened a wider regional war.

Israel intelligence chief goes to Qatar for talks with Hamas over Gaza ceasefire

An Israeli delegation led by Mossad chief David Barnea was on the way home from Qatar after a day of talks on finalising a ceasefire deal with Hamas, according to a person with knowledge of the talks.

The outcome of the talks, which will continue, wasn’t immediately known. Barnea, who leads the Israeli external intelligence agency, had been set to meet Qatar’s Prime Minister Sheikh Mohammed bin Abdulrahman Al Thani, the person said, asking not to be named discussing private matters.

Barnea made the trip after Israel received a fresh proposal from Hamas that could lead to the release of some hostages held in Gaza and a pause in the war between the two sides, still raging after almost nine months.

Gaza concerns take gloss off Labour’s UK election victory

Labour’s landslide UK election victory was tempered by some shock losses as the party haemorrhaged votes to independents who campaigned over Gaza and to the Greens in urban areas. Casualties included two members of leader Keir Starmer’s top team.

Among the high-profile defeats was Jonathan Ashworth, the shadow Cabinet Office minister and a key figure in the campaign, who unexpectedly lost his seat in Leicester South to an independent who focused on Gaza. Labour legislators Khalid Mahmood and Kate Hollern were also beaten by Gaza independents.

A central issue, especially among Muslims, was Starmer’s stance on the Israel-Hamas war. As he tried to avoid getting Labour pulled back into the anti-Semitism controversy that previously dogged the party, he’s been steadfast in his support of Israel’s right to self-defence since the conflict erupted in October.

Further damaging his standing with Muslims was the perception that he was slow to call for a ceasefire. Now a grouping of independent MPs, all elected on a pro-Palestine position, will be in parliament to keep him under pressure, with some in the Labour ranks also hoping Starmer will move quickly to formally recognise the state of Palestine. DM

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