By Steven Scheer
JERUSALEM (Reuters) - Israel's central bank is expected to lower short-term interest rates next week for the first time in nearly five years in response to a stronger shekel <ILS=> that has helped to push the inflation rate close to zero.
Ten of 16 economists polled by Reuters said policymakers would reduce the benchmark interest rate <ILINR=ECI> by 15 basis points to 0.1% when it announces its decision at 4 p.m. (1400 GMT) on Monday. Six others believe the Bank of Israel will maintain the benchmark rate at 0.25%.
After making a surprise increase from 0.1% last November, the monetary policy committee (MPC) has left the key rate unchanged in its seven subsequent meetings, the last being Oct. 7. The last time the MPC lowered rates was in February 2015, by 15 basis points to 0.1% -- where it stood until a year ago.
Economists believe the time is ripe for a reduction after two of five MPC members voted for a cut last month, and as the shekel has gained more than 7% against the dollar this year to weigh on exports while pushing inflation lower.
Inflation stood at 0.4% in October, above a rate of 0.3% in September but well below a peak of 1.5% in May as well as the government's annual target of 1-3%.
"The shekel is too strong. The Bank of Israel must realize that talking is not enough and action is necessary," said Ori Greenfeld, chief economist at Psagot Investments. Also, "the GDP (growth) numbers are worrying, especially regarding exports and inflation is below the target and expected to stay there."
Under Amir Yaron, who took over as central bank chief last December, the bank has shied away from intervening in the foreign exchange market, although it bought $314 million of foreign currency last month.
Most economists believe a rate cut could be a one-off since the central bank has never moved to negative rates.
However, Yaron said last month that negative rates were "one of the tools in our toolbox" and that if necessary, the committee "will take additional steps to make monetary policy even more accommodative."
Barclays economist Michael Kafe said he would be watching to see if negative rates come up for discussion, although he believes solid economic growth and low unemployment will keep the rate above zero.
The amount of attention the central bank has paid to the strong shekel "leads us to believe that the monetary authorities are deeply concerned about persistent shekel strength, and are likely to concentrate all their efforts on possible measures to arrest and if possible, reverse the trend," he said.
Israel's economy grew by an annualised 4.1% in the third quarter, according to a preliminary estimate, after a 0.8% increase in the prior three months. Unemployment was 3.7% in the quarter.
(Reporting by Steven Scheer; Editing by Gareth Jones)