Of the 14 economists polled by Reuters, seven projected the Bank of Israel would lower its benchmark rate by a quarter-point to 4.5% when it announces its decision on Monday at 4 p.m. (1400 GMT).

Another seven forecast no move, but economists agree the key rate will likely decline to 3.5%-4% in the coming year, starting in February.

"It's a difficult call this time," Bank Hapoalim economist Victor Bahar said.

The central bank had raised the rate 10 times in a row from 0.1% in April 2022 before pausing in July. It last lowered rates in April 2020.

Despite weakening growth and consumer prices, the Bank of Israel has been reluctant to begin lowering short-term interest rates, citing a main focus on stabilising markets and reducing uncertainty.

The inflation rate fell to 3.3% in November and is set to reach around 3% in 2023 - the top of the government's 1%-3% target range. Israel's war with Palestinian Islamist group Hamas that began on Oct. 7 is expected to lead to a large economic contraction in the fourth quarter and hamper growth into 2024.

"I see all the reasons why interest rates should be cut. Inflation is falling, inflation expectations are falling, economy is down, credit is falling and the real estate market is frozen," Alex Zabezhinsky, chief economist at the Meitav Dash brokerage, said.

Economists expecting no change believe there is too much economic uncertainty surrounding the war to start cutting in January, such as whether the conflict will spread to Hezbollah in Lebanon on the northern border as well as supply concerns. Also at issue is whether Israeli policymakers would want to pre-empt the U.S. Federal Reserve.

At the subsequent decision in February, there will be two more inflation readings along with more clarity on the war's impact.

Minutes of the Nov. 27 policy meeting's discussions showed policymakers were concerned over an expected sharp rise in state spending to help finance the war and compensation to those impacted by the Oct. 7 attacks.

Lawmakers have already added some 30 billion shekels ($8.3 billion) in spending to the 2023 budget and Finance Ministry officials seek to add another 50 billion shekels in 2024 that will push the budget deficit to around 6% of gross domestic product from a prior 2.25% target.

"Indicators from November and December actually show an improvement in consumption, the government deficit is climbing and the CPI has many measurement problems at the moment because of the war," said Harel Insurance and Finance economist Ofer Klein. "It's more reasonable to wait."

The central bank will also issue updated macro estimates on Monday, while at 4.15 p.m. Bank of Israel Governor Amir Yaron will hold a news conference.

($1 = 3.6212 shekels)

(Reporting by Steven Scheer; Editing by Alison Williams)

By Steven Scheer