JERUSALEM, March 29 (Reuters) - Israel's central bank is expected to raise short-term interest rates by a quarter-point next week to a 16-year high, likely taking a less aggressive path due to a tense political situation over planned judicial reforms and as it hopes to prevent a recession.
Of the 12 economists polled by Reuters, 11 project a 25 basis points hike to 4.5% - its highest level since 2007 - while one foresees a 50 basis point move when the central bank announces its decision next Monday at 4 p.m. (1300 GMT).
A number of economists had in recent days lowered their forecast to 25 from 50 basis points amid political chaos over the government's plan to enable parliament to override Supreme Court decisions and hold control over judicial appointments.
The judicial reform plans have led to some of the biggest street protests in Israeli history, with opponents calling the move a threat to democracy.
Prime Minister Benjamin Netanyahu on Monday shelved the plan for a month to try and reach a compromise with opposition parties.
Sill, with inflation deemed too "sticky" at a nearly 14-year high rate of 5.2% - above an official 1-3% annual target - the Bank of Israel is expected to raise rates for a ninth straight time.
"Against the background of the 'timeout' in the legislation and a possible relaxation in the (dollar-shekel) exchange rate, the chances of an interest rate increase of a quarter point outweigh the chances of an increase of half a point," said Ofer Klein, head of economics and research at Harel Insurance and Finance.
A 25-basis-point move would be the smallest since April 2022, when the central bank began the current monetary policy tightening cycle with a quarter point rise.
Since last May, however, the bank has been very aggressive, raising its key rate between 40 and 75 basis points. It last hiked by 50 basis points on Feb. 20 amid a weaker shekel against the dollar that keeps imported goods prices higher.
Worries over the judicial overhaul sent the shekel last week to a three-year low of 3.71 versus the U.S. currency but it has since moved back to 3.57 after the legislation was paused.
"If in a month, month-and-a-half there is no acceptable agreement by all sides and we get thrown back to social unrest, then that could lead to an additional depreciation of the shekel and from there more inflation and more Bank of Israel increases," said Bank Leumi chief economist Gil Bufman.
Israel's economy grew 6.4% last year but growth is forecast to slow to around 3% in 2023, economists estimate. Bufman said that consumer confidence is falling and could lead to weaker consumer demand and consequently lower price pressures.
He and others believe another hike or two is likely in coming decisions to 4.75% or 5%.
By raising rates now by a quarter point, Bufman said, it would "just slow down the process a little bit to allow the political process to run its course and come up with good results".
