Military officials said on Sunday that Israel was pulling some troops out of the city of Khan Younis in Gaza, saying it had ended its mission there as the war against Hamas reached the six-month mark.

Israel refrained from cutting interest rates on Monday, with the central bank focusing on protecting the shekel and cooling inflation expectations as the war in Gaza causes defence spending to surge. 

Israeli officials express optimism over ceasefire talks with Hamas 

Senior Israeli officials said progress had been made in negotiations for a ceasefire in Gaza that would include the release of hostages and Palestinian prisoners, a move that drew criticism from far-right ministers who threatened to bring down the government. 

The defence minister, Yoav Gallant, told military recruits that progress in the war had allowed Israel “to make difficult decisions to return the hostages. I think we are at an appropriate point.” A session of the security Cabinet, which generally meets on Thursday evening, had been called for Tuesday, Israeli TV channels reported. 

“We’ve reached a critical point,” Foreign Minister Israel Katz told Army Radio on Monday. “If matters work out, a large number of hostages will return home and then, in stages, everyone. But remember that we are dealing with Hamas and there is not a lot of time. I am more optimistic than I was.”

The comments are the most positive in months from top officials on the talks between Israel and Hamas, which have been mediated by the US, Egypt and Qatar. Just last week, Israeli officials said large gaps remained between the two sides, with the Iran-backed militant group demanding a complete withdrawal of Israeli troops from Gaza before any hostages would be freed.

For its part, Hamas, designated a terrorist organisation by the US and European Union, said on Monday there’d been no progress in the talks. A senior Hamas official, who asked not to be identified, said Israel hadn’t agreed to the group’s demands for a total ceasefire, full withdrawal of troops and free return of the displaced to the north. No new round of talks had been scheduled, the official said.  

International pressure has intensified on the Israelis since a missile strike killed seven aid workers delivering food to displaced Palestinians a week ago, with President Joe Biden telling Israel Prime Minister Benjamin Netanyahu that ongoing US support depends on improved steps to protect civilians. 

Netanyahu’s far-right coalition partners threatened to bring down the government if there was a permanent ceasefire, or the prime minister decided against an offensive on the Gazan city of Rafah — seen as the last bastion of Hamas and its leaders.

“If the prime minister decides to end the war without an extensive attack on Rafah in order to defeat Hamas, he will not have a mandate to continue serving as Prime Minister,” National Security Minister Itamar Ben Gvir of the far-right Otzma Yehudit party, posted on X.

Finance Minister Bezalel Smotrich, from the Religious Zionism party, called on Netanyahu to convene an urgent meeting of the extended Cabinet to discuss the developments in the war.   

“I have been warning for weeks that instead of taking our foot off the gas we should increase the pressure on Hamas in Gaza, and this is the only way we can return the hostages and destroy Hamas,” he said.

Israeli public broadcaster Kan said Smotrich was sending a message to Netanyahu that his party would neither go along with a permanent ceasefire nor a hostage deal that went too far. 

Israeli officials say US negotiators in Cairo are pressing both Israel and Hamas hard to reach an agreement. The US wants Gaza to receive far more humanitarian aid to combat disease and hunger, alongside a long pause in fighting and the freeing of hostages. From there, the US hopes to extend the truce and start rebuilding the decimated Gaza Strip.

Netanyahu has said that unless Israel defeats Hamas entirely, it will not have won the war. But he’s also under intense domestic pressure to bring back as many as possible of the more than 100 hostages still held in Gaza. 

The war started on 7 October when thousands of Hamas operatives broke into Israel from Gaza, killing about 1,200 people and abducting 250. Israel attacked by air, sea and land, and has killed about 33,000 Palestinians, according to the Hamas-run health ministry.

Israel pulls out of Khan Younis to prepare for ‘future operations’

Military officials said on Sunday that Israel was pulling some troops out of the city of Khan Younis in Gaza, saying it had ended its mission there as the war against Hamas reached the six-month mark.

Israel said its 98th Commando Division had moved out of Khan Younis and the Gaza Strip “to recuperate and prepare for future operations”. 

A significant Israel Defense Forces contingent would continue to operate in the enclave even after the troop drawdown in Khan Younis, Israel said. 

Gallant said the troops were withdrawn partly to prepare for an offensive on Rafah, the city in the far south of Gaza along the border with Egypt. The Israeli government has for weeks been saying it will attack Rafah because it houses several thousand Hamas fighters.

Most of Israel’s allies, including the US, have urged it to rethink its plans because there are more than one million civilians there. Washington is sceptical that they can be moved out safely before any offensive.

The Israeli newspaper Haaretz reported that Palestinians earlier displaced from Khan Younis — the second-biggest city in Gaza before the war — may now be able to return to their homes from Rafah, where they’ve been sheltering. Parts of Khan Younis have been reduced to rubble by Israeli airstrikes.

Israel holds steady on interest rates to protect shekel as war spending soars

Israel refrained from cutting interest rates on Monday, with the central bank focusing on protecting the shekel and cooling inflation expectations as the war in Gaza causes defence spending to surge.

The Bank of Israel’s Monetary Policy Committee left its key rate at 4.5% for the second consecutive meeting. Only a narrow majority of analysts, including JPMorgan Chase, predicted the move. The others expected a cut of 25 basis points.

The shekel extended its gains after the decision. It rose by 2.1% to 3.69 per dollar as of 5.50 p.m. in Tel Aviv, heading for its best daily performance this year. It reversed all the losses it suffered last week when Iran’s threat to retaliate against Israel for a deadly missile strike on one of Tehran’s embassy buildings in Syria unnerved markets.

“In view of recent developments, which indicate a substantial increase in the geopolitical uncertainty, the Monetary Committee decided to side with caution and kept the interest rate unchanged,” Governor Amir Yaron said.

Israeli assets, including stocks, were already rallying on Monday, in part because of optimism over a potential ceasefire deal with Hamas that would involve the release of Israeli hostages and Palestinian prisoners.

Despite inflation of just 2.5% year-on-year, the central bank weighed how there was little certainty over when the war in Gaza would end and how tensions with Iran and its main proxy group, Lebanon-based Hezbollah, were worsening. DM