Israeli airstrike, death of Egyptian soldier raise tension; Iran increases enriched uranium stockpile

Iran increased its stockpile of near bomb-grade uranium, a move that could flame tension across the wider Middle East as Tehran prepares to hold presidential elections next month.

Israel’s central bank left interest rates unchanged, as the prospect of easing grew more remote for an economy whipsawed by war.

Israel airstrike and death of Egyptian guard ratchet up tension

An Egyptian soldier was killed during a clash with Israeli troops at a Gaza border crossing on Monday while an Israeli airstrike on Sunday killed at least 40 Palestinians at a camp for displaced people, further inflaming regional tension over the Israel-Hamas war.

Egypt’s military confirmed that a border guard died at the Rafah border crossing on Monday, in bloodshed that threatened to escalate tension with Israel.

Separately, the airstrike at the camp northwest of the Gazan city of Rafah drew international condemnation. Israel acknowledged the death of dozens of people in the strike, which Prime Minister Benjamin Netanyahu called “a tragic mistake” in an address to the Knesset.

Israeli leaders said they were still investigating both incidents.

In the border clash, the Israel Defense Forces (IDF) said “a shooting incident occurred on the Egyptian border”, and that discussions with Egypt were ongoing, without giving any more detail.

Israel said the airstrike late Sunday at a Rafah tent community was based on “precise intelligence” and that it killed two “senior” officials from Hamas, designated a terrorist organisation by the US and European Union. But governments across the world were quick to condemn Israel for the strike. French President Emmanuel Macron said he was “outraged”, while EU foreign policy chief Josep Borrell said he was “horrified.”

The strike came two days after the International Court of Justice issued a ruling that many interpreted as ordering Israel to halt its operations to save civilian lives.

The area, in Rafah’s northwest, was overcrowded with tents from people fleeing the assault on the city, which the Biden administration had warned against because of the risk to civilian lives. Footage on social media showed fire spreading across tents as people pulled out the dead and injured.

“Our teams are doing their best to save lives,” the International Committee of the Red Cross said in a statement, adding that it was treating people from the strike at a field hospital. “It’s imperative to protect civilians.”

The area wasn’t among those ordered to be evacuated by the Israeli military as it prepared for the assault on Rafah, and it attracted many people fleeing areas deemed more dangerous.

The White House said that images of innocent civilians killed in the strike were “heartbreaking”.

“Israel has a right to go after Hamas, and we understand this strike killed two senior Hamas terrorists who are responsible for attacks against Israeli civilians,” the National Security Council said. “But as we’ve been clear, Israel must take every precaution possible to protect civilians.”

Israeli troops started operations around the outskirts of Rafah, which lies in southern Gaza, early this month. Prime Minister Benjamin Netanyahu has said Israel will attack the city because it’s the last bastion of Hamas, an Iran-backed Islamist group, and several thousand of its fighters are lodged there.

The US and other countries fear mass casualties among the Palestinian civilians in Rafah and have urged Israel to cancel or sharply curtail an assault to prevent harm to innocents. The White House said on Monday it was “actively engaging” with the IDF and partners in the region to better assess what had occurred.

The US and others have also voiced concerns about an Israeli attack on Rafah worsening ties with Egypt. The two Middle Eastern countries signed a peace deal in 1979, which is seen as crucial to Israel’s security.

Egypt has been highly vocal of the war in Gaza and consistently called on Israel to agree to a ceasefire.

The Israel-Hamas war began on 7 October when thousands of Hamas fighters crossed into southern Israel from Gaza, killing 1,200 people and abducting 250. Israel’s counterattack has killed some 35,000 Gazans, according to the Hamas-run health ministry.

Iran’s near bomb-grade uranium stock grows ahead of elections

Iran increased its stockpile of near bomb-grade uranium, a move that could flame tension across the wider Middle East as Tehran prepares to hold presidential elections next month.

It was the first nuclear safeguards assessment since Iran’s president and foreign minister died in a helicopter crash just days after top officials from the United Nations’ atomic watchdog travelled to the country to secure greater cooperation in their monitoring efforts.

International Atomic Energy Agency (IAEA) inspectors verified on Monday that Iran’s stockpile of highly enriched uranium rose by 17% over the last three months, according to a nine-page, restricted report circulated among diplomats and seen by Bloomberg. That’s enough uranium to fuel several warheads, should Iran make a political decision to pursue weapons.

“Further public statements made in Iran during this reporting period regarding its technical capabilities to produce nuclear weapons and possible changes to Iran’s nuclear doctrine only increase concerns about the correctness and completeness of Iran’s safeguards declarations,” IAEA Director-General Rafael Mariano Grossi said in the report.

Recent tit-for-tat missile strikes between Israel and Iran have added urgency to the IAEA’s yearslong search to uncover the scope of Tehran’s nuclear ambitions. While the IAEA carries out daily inspections of declared atomic facilities, suspicions linger over whether Iranian engineers could be concealing work used for military purposes. Tehran has blocked the agency’s investigation into uranium detected at undeclared locations.

While Iran insists it isn’t looking to produce nuclear weapons, international mistrust prompted a negotiated compromise in 2015 that restricted the country’s atomic activities in exchange for sanctions relief. Recent statements by current and former Iranian officials that the country could revisit its nuclear doctrine — and potentially build a weapon — prompted Grossi to renew attempts at diplomacy through his visit earlier this month.

Bank of Israel forgoes rate cut, warns on war budget, inflation

Israel’s central bank left interest rates unchanged, as the prospect of easing grew more remote for an economy whipsawed by war.

The monetary committee kept its benchmark at 4.5% on Monday, in line with the forecasts of all economists surveyed by Bloomberg. The shekel briefly pared its earlier decline before reversing and trading about 0.5% weaker against the dollar as of 4:50 p.m. in Tel Aviv.

In a statement accompanying the decision, policymakers largely repeated their neutral guidance from April, without indicating the likely direction of their next move. But they warned of a range of threats to inflation and said they expected a continued increase in the budget deficit over the coming months.

Israeli policymakers, who earlier signalled as many as three more cuts in 2024, have turned more cautious after a rate decrease to start the year. The change of tack is in large part a reflection of economic spillovers from the war against Hamas that’s now dragged on for more than seven months.

Citigroup no longer expects Israel to resume reductions this year and Bank Hapoalim called them “far from certain”. Traders have also unwound bets that further easing is imminent.

The central bank said, “The Committee’s assessment is that there are several risks of a potential acceleration in inflation: geopolitical developments and their effects on economic activity, a depreciation of the shekel, continued supply constraints on activity in the construction and air travel industries, fiscal developments, and global oil prices.”

A ramp-up in budget spending is feeding through to inflation that’s approaching the top of the government’s 1%-3% target range after a two-month acceleration. A probable later start to rate cuts by the US Federal Reserve will probably shift the timeline for the Bank of Israel’s easing as well.

A wider rate differential between Israel and the US threatens capital inflows and could undercut the local currency. Though the shekel has recently recouped some losses suffered in March-April, its three-month historical volatility at over 10% trails only Chile’s peso, the Russian rouble and South Africa’s rand among a basket of 31 major currencies tracked by Bloomberg.

Israel’s war bill has already amounted to $16-billion, swelling the 12-month trailing budget deficit to 7% of gross domestic product as of April. Bank of Israel Governor Amir Yaron has repeatedly called on the government to adopt a responsible fiscal policy in the face of soaring defence outlays.

On Monday, the central bank said it expected the cumulative annual deficit “to continue to climb in the coming months, and to converge back to an environment similar to the current one toward the end of 2024, provided that there are no notable deviations in security expenditures”. DM