By Steven Scheer

By Steven Scheer

JERUSALEM (Reuters) - Israel's central bank is expected to leave short-term interest rates unchanged for a 22nd straight month next week, as policymakers believe the deflation trend is dissipating.

All 10 economists polled by Reuters forecast the Bank of Israel would hold its benchmark interest rate <ILINR=ECI> at a record low of 0.1 percent when the decision is announced on Monday at 4 pm (1400 GMT).

Last month, all four rate setters voted for no change in rates, citing a recent upward trend in inflation mainly due to the "dissipation of the effect of the declines in energy prices and price reductions initiated by the government".


Still, annual inflation, which held steady at -0.3 percent in November, remained well below the government's annual 1-3 percent target and is only expected to reach a rate of +0.5 percent in the coming year, based on bond yields.

The central bank, though, believes growth in wages will help to push inflation back to its target in 2017.

Policymakers do not see lower rates but it was also unlikely rates would start to rise anytime soon, even if the Federal Reserve continues to raise U.S. rates.

In addition to its rates decision, the Bank of Israel will publish its quarterly economic update. In September, the bank raised its economic growth estimate for Israel in Israel to 2.8 percent from 2.4 percent and to 3.1 percent from 2.9 percent for 2017.

Economists expect even higher estimates on Monday in the wake of annualized growth of 4.9 percent in the second quarter and a preliminary 3.2 percent pace in the third quarter, which saw a drop in exports and a slowdown in consumer spending.

"In view of all the positive indicators published during the last quarter and the rise in oil prices, the economic growth forecast will be raised as well as the inflation forecast," said Ofer Klein, head of economics and research at Harel Insurance and Finance.

But he said the central bank might opt to leave alone its expectation that interest rates would remain steady until a 0.15 percentage point increase in the fourth quarter.

That would be despite higher U.S. rates and "to hint that the bank intends to expand the rates differential with the United States to create pressure to depreciate the shekel in the short term," he said.

The shekel has appreciated to 3.83 per dollar from a 3.87 rate a month ago, although it has gained to a 15-year high of 3.99 per euro from 4.1 at the last rates decision.

(Reporting by Steven Scheer; Editing by Toby Chopra)

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