By Steven Scheer
JERUSALEM (Reuters) - Israel's central bank is expected to leave short-term interest rates unchanged next week but analysts believe a rate reduction remains possible this year as long as inflation stays very low.
Twelve of 13 economists polled by Reuters said policymakers would keep the Bank of Israel's benchmark rate <ILINR=ECI> at 0.25% when it announces its decision at 4 p.m. (1300 GMT) on Monday. One analyst expects a 15 basis point cut.
After making a surprise increase from 0.1% last November, the monetary policy committee (MPC) has left the key rate unchanged at its six subsequent meetings, the last being Aug 28.
Economists largely believe a strong economy and tight labour market will keep the central bank on hold this month, even as inflation remains below the government's annual 1-3% target range at a 0.6% rate in August. The rate had dropped to a low of 0.5% in July from 1.5% in May.
At the same time, Israel's budget deficit is near an annual rate of 4% of gross domestic product and there is little the government is able to do to reduce it until a new government is in place - a process that could take until late in the year or early 2020.
"With no fiscal consolidation in sight, I doubt the MPC wants a looser monetary policy," said Jonathan Katz, chief economist at Leader Capital Markets.
At the August decision, the MPC reversed course from a belief that rate increases were possible this year by saying the rate will not rise for a prolonged period.
It cited uncertainty over the inflation outlook and fiscal policy as well as risks to Israel's economy from an expected slowdown in global trade.
It also said that before taking any further accommodative measures to match easier policy by global central banks, it was best to examine the inflation trend and economic developments.
Still, JP Morgan economist Yarkin Cebeci said he expects a 15 basis point reduction next week to help weaken the shekel <ILS=>, which has gained 6.5% against the dollar this year, since the central bank has expressed concerns that a strong shekel has pushed the inflation rate down.
Amir Kahanovich, chief economist for the Excellence Investment House, projects a possible cut at the next meeting in late November and negative rates in 2020.
In addition to the rate decision, the Bank of Israel on Monday will publish updated macro forecasts.
In its prior update in July, the bank's staff had forecast an interest rate of 0.5% by the end of 2019 and a 1% rate in 2020. It also foresaw economic growth of 3.1% this year and 3.5% in 2020, with inflation at 1.6% in both years.
(Reporting by Steven Scheer; Editing by Alison Williams)
