Investing.com -- Fed Chairman Jerome Powell is likely lay out the case for rate cuts starting September when he takes to the stage at the annual central bank symposium in Jackson Hole, Wy., slated for next week but the Fed chief is expected to stress that cuts would be "orderly," downplaying the prospect of a 50 basis point cut next month. 

"We expect Chair Powell will lay out a case for an orderly withdrawal of monetary policy restrictiveness in a speech at Jackson Hole the morning of Friday, August 23, and by orderly, we mean 25 bp rate cuts, rather than 50 bp," economists' at UBS said in a recent after updating their rate cut call.

"We expect three 25 bp rate cuts this year, one at each of the September, November and December FOMC meetings," they added, expecting that the Fed's September meeting will reflect consensus among voting members that fed policy was now restrictive amid slowing growth. 

Powell is expected "to make the case to take out a little more restrictiveness in the next few meetings than previously signaled, to better position policy, something of a recalibration," UBS said, but remain data dependent. 

But the Fed chief is unlikely to signal that rate cuts will be ongoing as he is expected to "remain data dependent and caution that ongoing rate cuts after any recalibration should depend upon ongoing progress on inflation toward 2%, weighed against the risks to the labor market expansion,"  the economists said. 

Many on Wall Street have called for aggressive cuts in the wake of the weaker July nonfarm payrolls report that triggered the Sahm Rule -- a measure suggesting a recession is underway when the three-month average U.S. unemployment rate rises by 0.50% or more from its 12-month low -- but against the backdrop of slowing but real GDP growth ... "would not seem that ominous," they added. 

Others agree, with Morgan Stanley downplaying the recession signal from the rise in unemployment rate isn't as worry as in previous cycles because labor demand is holding up relatively well. 

"The recessionary signal from the unemployment rate should come primarily from the fall in labor demand, and so the current rise in the unemployment rate, though seemingly as large as the beginning of other downturns, is actually only about half the signal as in the past," Morgan Stanley added.

While the Fed may pause rate cuts to reassess, UBS says it is "comfortable" with its projection that headline PCE  inflation touches 2.0% and core 2.1% in the second quarter of next year, encouraging the Fed to continue with rate cuts next year. 

"While successive three 25 bp rate cuts this year would reposition policy more in line with a policy rule, the FOMC may want to just keep going in 2025 since our forecast expects further slowing from here, if not recession," it added.

LONDON (Reuters) - British consumer price inflation rose to 2.2% after two months at the Bank of England's 2% target, a slightly smaller increase than economists expected, and services inflation, closely watched by the BoE, slowed sharply, official data showed.

Economists polled by Reuters had forecast the annual headline CPI rate would rise to 2.3%.

Sterling fell sharply against the U.S. dollar after the data was published on Wednesday.

When the BoE cut interest rates from a 16-year high of 5.25% at the start of this month, it said May and June's 2% inflation readings probably marked a low point for inflation.

The central bank expected CPI to rise to 2.4% in July and reach around 2.75% by the end of the year as the effect of sharp falls in energy prices in 2023 faded, before returning to 2% in the first half of 2026.

British inflation peaked at a 41-year high of 11.1% in October 2022 driven by a surge in energy and food prices after Russia's full-scale invasion of Ukraine as well as COVID-19 labour shortages and supply chain disruption.

The BoE remains relatively focused on longer-term inflation pressures, including services prices and wages as well as general labour market slack.

Wednesday's data showed that annual services price inflation fell to 5.2% in July from June's 5.7%, lower than the Reuters poll forecast of 5.5% and the lowest since June 2022. BoE staff had predicted a drop to 5.6%.

Official data on Tuesday showed that annual wage growth excluding bonuses slowed to its lowest in nearly two years at 5.4%, in line with economists' forecasts but still nearly double the rate the BoE sees as consistent with CPI staying at 2%.

(Reuters) -Japanese Prime Minister Fumio Kishida said he will step down in September, ending a three-year term marred by political scandals and paving the way for a new premier to address the impact of rising prices.

Kishida's decision to quit triggers a contest to replace him as president of the ruling Liberal Democratic Party (LDP), and by extension as the leader of the world's fourth-biggest economy.

Here are some reactions to the news from market and political analysts:

KOICHI NAKANO, POLITICAL SCIENCE PROFESSOR, SOPHIA UNIVERSITY, TOKYO

"I was expecting Kishida not to be able to run for quite some time. And that's to do with basically the statistics. He's already passed average tenure of an LDP prime minister by serving three years. And he's not anywhere near a position to be able to say, ‘I'm special, I need more time.’ So he was running against the odds to begin with.

"And at the end of the day, an LDP incumbent prime minister cannot run in the (party) presidential race unless he's assured of a victory. It's like the grand champion yokozunas of sumo. You don't just win, but you need to win with grace. And so if you can't do that, you're supposed to retire. It's considered to be unseemly for the president to run and to get defeated as an incumbent.

RINTARO NISHIMURA, ASSOCIATE OF THE ASIA GROUP, A WASHINGTON-BASED STRATEGIC ADVISORY FIRM, TOKYO

"It’s open field for the next president. Kishida's endorsement will matter as well. Will he back someone from his own faction, like Hayashi or Kamikawa, or ride the wave with another candidate, such as Ishiba, Kono, Koizumi. The new leader needs to be a fresh face, whether that means young or not associated with Kishida, and reform-minded, showing voters that the party will change.

"The new leader will have a tough job navigating this tough political environment and heading into a general election knowing the poll numbers are not looking good. An election is likely to be right after the new PM is sworn in, as new PMs tend to have a slight boost in poll numbers. It’s better to call before negatives come up."

MIKITAKA MASUYAMA, PROFESSOR AT THE NATIONAL GRADUATE INSTITUTE FOR POLICY STUDIES

"Support for the prime minister has been sluggish of late and the voices calling for his stepping down have been loud. The leader of the Liberal Democratic Party is tantamount to prime minister. Anyone in the position should be able to bring the party together and manage the government. Someone with experience is better than those who are just popular in voter polls.

"If Kishida picked (Foreign Minister Yoko) Kamikawa, and others in the LDP joined him, she could be the one."

SHOKI OMORI, CHIEF JAPAN DESK STRATEGIST, MIZUHO SECURITIES, TOKYO

"Political uncertainty isn’t good at all, with Mr. Kishida not even raising his hand for election. The market implication is that Japanese politics is going to be foggy, and whoever the LDP premier will be, the cabinet choice is going to be very unclear and thus the policy path is going to be a mystery. In short, risk-assets, particularly equities, will likely be hit the most, given foreign investors’ attention and big inflow/outflow in the markets.

"Market participants are going to dislike the uncertain situation, especially those investing in risk assets, such as equities. PM Kishida pushed for New NISA (investment accounts) and now he’s pulling back. Yen is going to depend on external factors especially U.S. data and the Fed. JGBs will still remain a supply/demand market. My initial view is that equities are going to be hit the most."

CHARU CHANANA, HEAD OF CURRENCY STRATEGY, SAXO, SINGAPORE

"While Kishida’s stepping down could bring some uncertainty, his low approval ratings mean a significant negative reaction from equities may be avoided."

MICHAEL CUCEK, PROFESSOR SPECIALISING IN JAPANESE POLITICS, TEMPLE UNIVERSITY, TOKYO

"He’s been a dead man walking for quite some time. That there was no way to add up the numbers so that he would get reelected was clear for a long time. Public discontent with Kishida was connected with the LDP’s entanglements with the former Unification Church, which became apparent after Abe’s assassination, as well as slush fund scandals, and the slide in the yen that increased inflation pressures."

TAKAHIDE KIUCHI, NOMURA RESEARCH INSTITUTE EXECUTIVE, TOKYO

"The Kishida administration at first raised market concerns by leaning to (re)distribution measures, but it later pivoted to expansionary policies such as the 'asset income doubling plan', which was well received by the markets. However, the administration has recently launched policies with unclear objectives such as tax cuts, giving an inconsistent impression on its policy focuses."

KENTA IZUMI, LEADER OF THE BIGGEST OPPOSITION CONSTITUTIONAL DEMOCRATIC PARTY (POST ON X), TOKYO

"The issues of the former Unification Church, political money and inflation countermeasures have been headache for him, but these problems are still unsolved."

RAHM EMANUEL, US AMBASSADOR TO JAPAN(POST ON X), TOKYO

"Under Prime Minister Kishida’s steadfast leadership, Japan and the United States have ushered in a new era of relations for the Alliance."

By Lucy Craymer

WELLINGTON (Reuters) -New Zealand's central bank slashed its benchmark cash rate for the first time since March 2020, sending the local dollar tumbling as policymakers flagged more cuts over the coming months saying inflation was converging on its 1% to 3% target.

The decision to reduce rates by 25 basis points to 5.25% came almost a year ahead of the Reserve Bank of New Zealand's (RBNZ) own projections, taking some market players by surprise.

The policy easing was in line with market pricing but defied most economists' expectations, with 19 of 31 economists in a Reuters poll having forecast the central bank to hold steady as they have since May 2023.

"The Committee agreed to ease the level of monetary policy restraint by reducing the OCR (official cash rate)," the central bank said in its statement.

“The pace of further easing will depend on the Committee’s confidence that pricing behaviour remain consistent with a low inflation environment, and that inflation expectations are anchored around the 2 percent target,” it added.

Investors reacted by knocking the kiwi dollar down 0.75% to $0.6032, erasing most of the 1% gains made overnight as soft U.S. producer price data slugged the U.S. dollar. Swaps shifted to imply another 29 basis points of easing by October and 67 basis points of easing by year end. Rates are seen near 3.0% by the end of 2025, well below the RBNZ's projection. Bank bill futures also jumped.

ASB Bank chief economist Nick Tuffley said he expects the RBNZ will continue steadily cutting the cash rate by 25 basis points in consecutive meetings.

“If inflation pressures evaporate faster than expected, the RBNZ may need to hasten the return to a more neutral setting of around 3.25%,” Tuffley added. ASB Bank along with Kiwibank announced they would cut their mortgage lending rates.

The RBNZ's forward guidance suggested at least three more cuts by the middle of next year, projecting the cash rate at 4.9% in the fourth quarter of 2024 and 4.4% in the second quarter of 2025. Previously, it had not expected to start cutting rates until the middle of 2025.

The minutes of the meeting, released alongside its statement, said the Committee observed that the balance of risks has progressively shifted since the May Monetary Policy Statement.

“With a broad range of indicators suggesting the economy is contracting faster than anticipated, the downside risks to output and employment that were highlighted in July have become more apparent,” the minutes added.

A global front-runner in withdrawing pandemic-era stimulus, the RBNZ has lifted rates 525 basis points since October 2021 to curb inflation in the most aggressive tightening since the official cash rate was introduced in 1999.

New Zealand's annual inflation has come off in recent months and is currently running at 3.3% with expectations that it will return to the central bank's target band in the third quarter of this year.

The rate hikes have sharply slowed the economy with meagre first quarter growth and recent data indicating still-subdued momentum.

New Zealand joins other central banks that are starting to ease rates. The European Central Bank, Canada, Sweden and Switzerland have all cut interest rates and an increasing number of analysts are now pencilling in a half-a-percentage-point rate cut for the Federal Reserve's September meeting.

New Zealand's neighbour Australia, however, is an exception to the global easing trend. The Reserve Bank of Australia last week ruled out near-term rate cuts.

(Reuters) - Credit ratings agency Fitch downgraded Israel's credit rating to "A" from "A-plus" on Monday, citing worsening geopolitical risks as the war in Gaza drags on, and kept the rating outlook negative, meaning a further downgrade is possible.

The ratings agency expects the Israeli government to permanently increase military spending by close to 1.5% of GDP versus pre-war levels, putting upward pressure on the country's budget deficit and debt levels. 

"In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts," the ratings agency said in a statement.

Prime Minister Benjamin Netanyahu said he expected the rating would be upgraded again once Israel wins the war.

"Israel's economy is strong and is functioning very well. The rating downgrade is a result of Israel dealing with a multi-front war forced upon it," Netanyahu said in a statement.

Israel's war in Gaza, triggered by the Islamist group Hamas-led cross-border attack on Oct. 7, has cost thousands of lives and is in danger of expanding.

Earlier this year, Moody's (NYSE:MCO) and S&P Global also cut their credit rating for Israel, citing elevated geopolitical risks.

Fears that the conflict in Gaza could turn into a broader Middle East war have escalated after the killing of Hamas leader Ismail Haniyeh in Iran and top Hezbollah military commander Fuad Shukr in Beirut. Israel is braced for significant attacks from Iran and Hezbollah in Lebanon.

"The downgrade following the war and the geopolitical risks it creates is natural," Israeli Finance Minister Bezalel Smotrich said on X.

Israel's shekel fell as much as 1.7% against the dollar on Monday and stocks ended over 1% lower in Tel Aviv as investors fret over a possible attack on Israel. The shekel opened 0.3% higher on Tuesday while the stock market is closed for a Jewish fast day.

Heightened tensions between Israel and Iran and its allies could imply significant additional military spending, destruction of infrastructure and damage to economic activity and investment, Fitch said.

"Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term," Fitch said.

Israel's budget deficit reached 8.1% of GDP in July but Smotrich has expressed confidence it will move back towards its 6.6% target for 2024 by year end.

Yali Rothenberg, the finance ministry's top accountant, said Israel's economy was strong and the country still had access to global capital markets but called for a 2025 state budget that would rebuild fiscal reserves through a gradual decrease in the debt to GDP ratio.

Preliminary discussions on the 2025 state budget have already begun. Smotrich said a responsible budget would be approved that would support the war while maintaining fiscal frameworks. "Very quickly, the ratings will rise again," he said.

By Jihoon Lee and Cynthia Kim

SEOUL (Reuters) - South Korea's mom-and-pop investors are defying last week's global financial markets rout by pouring even more funds into U.S. stocks, a years-long trend that analysts and investors bet will continue due to the depressed value proposition at home. South Korean retailers have been scooping up Nvidia (NASDAQ:NVDA), Tesla (NASDAQ:TSLA) Inc. and Apple shares (NASDAQ:AAPL) this year fuelled in part by the worldwide AI-frenzy, a move that comes despite government efforts to boost the domestic stock market. Sunny Noh, a 49-year-old who has been investing in Tesla since 2020 and now holds about 85% of his financial assets in the electric-vehicle maker, said he sees the recent market plunge as a long-term buying opportunity. "It can fall in a year or two, but it will rise again in the longer term of 10 years," he said. Retailers like Noh have been frustrated by the so-called "Korea discount" of lower shareholder returns and depressed valuations in the $1.8 trillion stock market, home to global tech titans like Samsung Electronics (KS:005930) and SK Hynix and automakers such as Hyundai Motor (OTC:HYMTF).

For South Korean listed companies, the last 10-year ratio of dividend payment to net income, for instance, stood at an average of 26%, lower than 55% in Taiwan, 36% in Japan and 42% in the U.S., according to the Financial Services Commission.

Investors are even more disappointed that Samsung and Hynix aren't in the forefront of the AI-boom. Shares of Samsung are down 4% so far this year versus a 120% surge for Nvidia. Hynix has fared better, up 25%. The past 10-year price-to-book ratio for Korean companies sits at an average of 1.04 versus 3.64 for the U.S.

These numbers partly explain why retailers, popularly known as "ants" because of their massive 14-million number and capacity to act as a powerful collective force, have been investing in droves in overseas markets for well over a decade.

Ants like Noh bought $9 billion worth of U.S. stocks between January-July this year, after selling $2.8 billion in 2023 - the first sell-off after three years of a U.S. stock investment boom. They sold a record-high 16.3 trillion won ($11.9 billion) worth of domestic stocks in the same period, driving the KOSPI down 1.3% so far this year when the S&P 500 and Nikkei jumped 13% and 5%, respectively.

To be sure, foreign buying of Korean stocks between January-July also rose to a record 27 trillion won, but they accounted for 27% of average daily turnover versus 54% for retailers.

FALTERING AMBITIONS? The retail-outflow trends spell trouble for the Yoon Suk Yeol's government-driven ambitions to boost depressed stock valuations. A planned capital gains tax, slated for next year, is also expected to discourage investors although Yoon has promised to scrap it. Oh Jeong-min, a 42-year old retail investor who lost about 10%, or around 100 million won ($73,012) from his domestic and U.S. stocks during last week's market shakeout, says he has recouped some of the losses and plans on buying more U.S. shares "when the time is right.""The kind of dividend payout and shareholder return trend I see in U.S. companies is simply hard to spot in Korea," he said. Noh and Oh are part of a group of eight analysts, investors and government officials who told Reuters they expect the fund-outflows trend to continue as an ageing population seeks higher returns.

"We are aware of the trend and the objective of the Value-up Programme is to vitalise investment among not only retail investors but also institutional and foreign investors by making the domestic stock market more competitive," an official at the Financial Services Commission said. In February, the government proposed a "Corporate Value-up Programme", mirroring Japan's capital market reforms, which includes tax incentives to attract retail investors. Many analysts say the programme will probably have only a modest impact due to opaque governance structures of South Korea's family-run "Chaebol" conglomerates, where controlling families usually pass down stakes to the next generation at low market value.

"While in Japan, the mere directive from the stock exchange to make improvements was apparently sufficient to effect change, it is doubtful whether government persuasion alone will be sufficient in Korea, at least for Chaebol groups," analysts at Mondrian Investment Partners said in a note. In early July, Elon Musk called South Koreans "smart people" in an X post, after data showed Tesla was the top U.S. stock held by South Koreans. Their holdings stood at $13.6 billion as of end-July, followed by Nvidia at $12 billion and Apple at $5.1 billion.

"South Korea has become a remarkable market in Asia, with the size of South Koreans' investment in U.S. stocks now exceeding Japan's," said Seungyeon Kim, CEO at Toss Securities. Oh, the retail investor, is betting on more upside for U.S. stocks.

"There's no doubt that as an investor, you should choose the U.S. market if you think long-term."

($1 = 1,369.6200 won)

By Ankur Banerjee

SINGAPORE (Reuters) -Japanese shares led Asia higher on Tuesday with the yen on the back foot, ahead of a slew of data this week, including on U.S. inflation, which will help investors gauge the Federal Reserve's policy outlook after volatile markets last week.

Oil prices eased after a 3% jump on Monday as investors kept a wary eye on the risk of a widening conflict in the Middle East that could pinch global crude supplies. Demand for safe-haven assets lifted gold, although they slipped a bit on Tuesday. [GOL/]

Japan's Nikkei rose more than 3% following a holiday on Monday, a welcome relief after last week's wild swings that began with a massive sell-off spurred by a rising yen and fears of a U.S. recession. (T)

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.15% to 556.55. Chinese stocks edged down while Hong Kong's Hang Seng Index ticked up 0.1%.

European stock markets were due for a higher open, with the Eurostoxx 50 futures up 0.3% and FTSE futures 0.26% higher.

"While aftershocks might reveal vulnerabilities, we continue to view recent volatility as being an equivalent of a 'heart palpitation' not a 'cardiac arrest'," Viktor Shvets, head of global desk strategy at Macquarie Capital said in a note.

"We also maintain that the nervousness about a U.S .slowdown is overdone."

However, investor sentiment remains fragile. The yen dropped 0.34% to 147.72 per dollar on Tuesday, having touched a seven-month high of 141.675 on Monday last week, a far cry from the 38-year lows of 161.96 it was rooted to at the start of July.

A Bank of Japan rate rise last month following bouts of intervention from Tokyo earlier in July wrong-footed investors and led them to bail out of popular carry trades, which use the currency of a low-rate market to fund investments with higher returns.

The latest weekly data to Aug. 6 showed that leveraged funds - typically hedge funds and various types of money managers - closed their positions in the yen at the quickest rate since March 2011.

Given the yen's recent rally, dollar-yen is now more in sync with its yield differential, according to Karsten Junius, chief economist at Bank J. Safra Sarasin.

"Another wave of the yen-funded carry trade unwind will likely push the yen still somewhat higher towards year-end. Yet we do not expect USD-JPY to fall meaningfully below 140."

DATA HEAVY WEEK

Data this week will help sharpen views on the Federal Reserve's next moves. Markets are evenly split between a 25 basis-point cut or a 50-bp cut at the next meeting in September.

Traders are pricing in 100 bps of cuts this year.

Surprisingly soft payrolls data stoked U.S. recession worries and kicked off the market meltdown at the start of last week. But strong U.S. data helped allay fears of a global slowdown, and stocks recovered by the end of the week.

U.S. producer price data for July is due later on Tuesday. The figures could feed through to the core personal consumption (PCE) measure favoured by the Fed.

Any hints from the PPI of soft inflationary pressures could cause financial markets to double down on wagers the Fed will sharply cut rates this year, which would weigh on the dollar, said Kristina Clifton, a senior economist at Commonwealth Bank of Australia (OTC:CMWAY). 

On Wednesday, U.S. consumer price index data for July is due and is expected to show that month-on-month inflation ticked up to 0.2%. Retail sales data is scheduled for Thursday.

The dollar index, which measures the U.S. currency against six rivals, was 0.04% higher at 103.12. The euro was steady at $1.0940, while sterling was up 0.1% at $1.2778.

In commodities, Brent crude futures eased 0.67% to $81.75 a barrel, while U.S. West Texas Intermediate crude futures slipped to $79.59 a barrel, down 0.59%. Brent had gained more than 3% on Monday, while U.S. crude futures had risen more than 4%. [O/R]

By Seunggyu Lim

SEOUL (Reuters) - South Korea plans to announce guidelines to encourage the use of an alternative benchmark in its $4.3 trillion interest rate swap market and replace Certificate of Deposit (CD) rates that currently dominate transactions, two sources said.

The Bank of Korea and the Financial Services Commission are working on transaction guidelines to supplant CD rates with the Korea Overnight Financing Repo rate (KOFR), and at the same time introduce the KOFR-linked Overnight Index Swap market, the sources who were familiar with the matter said.

"The BOK and the FSC will make clear their intention to restrict the use of the CD interest rate when conducting future interest rate swap transactions, although they won't talk about any specific schedules to phase it out," one of the sources told Reuters, asking not to be named due to the sensitivity of the matter.

With the global cessation of the London interbank offered rate, South Korea has been working to develop alternative reference rates locally and address fluctuations in CD rates arising from changes in CD issuances.

In South Korea, 5,874 trillion won ($4.3 trillion) worth of interest rate swap transactions are mostly tied to CD rates, and financial authorities have been working to replace CD rates with the KOFR and prepare the market for the benchmark transition.

Interest rate swaps are trades of a fixed interest rate for a floating rate or vice versa, widely used by investors and banks to hedge risks in financial markets.

CD rates have been South Korea's most widely used reference rates used to determine the cost of borrowing, from interest rate swaps and collateralized loan obligations. ($1 = 1,370.5500 won)

By Jonathan Stempel

NEW YORK (Reuters) - The U.S. Securities and Exchange Commission on Monday sued the cryptocurrency company NovaTech and its married co-founders, saying they fraudulently raised over $650 million from more than 200,000 investors worldwide, including many Haitian-Americans.

NovaTech and co-founders Cynthia and Eddy Petion allegedly promised investors their money would be safe, with Cynthia Petion assuring they would be "in profit from day one."

The SEC said the Petions instead used new money mainly to repay earlier investors and pay commissions to promoters, while siphoning millions of dollars for themselves. It said the scheme lasted for four years until NovaTech's May 2023 collapse.

Monday's lawsuit in Miami federal court came two months after New York Attorney General Letitia James sued NovaTech and the Petions in a state court in Manhattan, estimating their fraud at more than $1 billion.

The regulators said NovaTech tried to appeal to victims' religious faith through social media, Telegram and WhatsApp, and sometimes in the Haitian Creole language, with Cynthia Petion branding herself "Reverend CEO" and saying NovaTech was "God's vision."

Lawyers for NovaTech and the Petions, who are believed to live in Panama, could not immediately be identified.

Both regulators called the fraud a pyramid scheme, where companies pay bonuses or commissions to recruit new investors.

The SEC also charged six NovaTech promoters with fraud, saying they kept recruiting investors despite "red flags," such as delayed withdrawals and U.S. and Canadian regulatory actions, that raised questions about NovaTech's legitimacy.

One promoter, Martin Zizi, agreed to pay a $100,000 civil fine. His lawyer did not immediately respond to a request for comment.

Both lawsuits seek restitution for victims and civil fines.

The case is SEC v Nova Tech Ltd, U.S. District Court, Southern District of Florida, No. 24-23058.

(Reuters) -Credit ratings agency Fitch downgraded Israel's credit rating to "A" from "A-plus" on Monday, citing worsening geopolitical risks as the war in Gaza drags on, and kept the rating outlook negative, meaning a further downgrade is possible.

Israel's war on Gaza, triggered by the Islamist group Hamas-led cross-border attack on Oct. 7, has cost thousands of lives and unfolded into a humanitarian crisis.

"In our view, the conflict in Gaza could last well into 2025 and there are risks of it broadening to other fronts," the ratings agency said in a statement.

"The downgrade following the war and the geopolitical risks it creates is natural," Israeli Finance Minister Bezalel Smotrich said on X.

Fears that the conflict in Gaza could turn into a broader Middle East war have escalated after the killing of Hamas leader Ismail Haniyeh in Iran and top Hezbollah military commander Fuad Shukr in Beirut.

Israel's shekel fell as much as 1.7% against the dollar on Monday and stocks ended over 1% lower in Tel Aviv as investors fret over a possible attack on Israel.

Heightened tensions between Israel and Iran and its allies could imply significant additional military spending, destruction of infrastructure and damage to economic activity and investment, Fitch said.

The ratings agency expects the Israeli government to permanently increase military spending by close to 1.5% of GDP versus pre-war levels as the country strengthens its border defenses. 

"Public finances have been hit and we project a budget deficit of 7.8% of GDP in 2024 and debt to remain above to 70% of GDP in the medium term," Fitch said. It forecast the country's debt will remain on an upward trend beyond 2025 if higher military spending and economic uncertainties continue.