Analysts expect the Bank of Israel to leave its lending rates for October unchanged from September, at a nominal rate of 9.1%.

The Bank of Israel announces its monetary policy for the coming month on the last Monday of the month. This time analysts concur that the rates are likely to stay unchanged, based largely on the weakening of the shekel.

Until the dollar's recent surge against the Israeli currency to its current level of about 4.8 shekels, most analysts had expected a tweak downwards, by about 0.2% or 0.3%.

One of the factors behind the drop of the shekel has been the downgrading of Israel's biggest banks by Standard and Poor's. Other rating agencies are reportedly waiting in the wings to follow suit.

Other factors are the escalating tensions on the Iraqi front, and uncertainty about Israel's 2003 budget. The Knesset returns from summer recess in about a week, and is expected to begin debating the budget immediately. As the tightened budget's enactment is far from certain, analysts believe the Bank of Israel will keep the monetary brakes on for the time being.

Bank Hapoalim analysts say that the apparent ebb in inflation cannot compete with the above factors. In any case the shekel-dollar exchange rate is a key element affecting interest rate policy, the bank notes, and the shekel is not seen likely to rebound in the short run.

In the medium to long run, however, the interest rate gap in the shekel's favor should support the Israeli currency, keeping it below 4.8 to the dollar.

Shlomo Maoz, the chief analyst of Tel Aviv brokerage Nessuah Zannex, reminds that Israel's national debt climbed to 103% of the nation's gross domestic product, after 20 straight years of decline.

Moreover, the treasury's director-general, Ohad Marani, admitted that tax revenues have fallen about a billion shekel short of expectations for this year so far, and said that the government would defer spending from this year to next. These factors will also contribute to a central bank decision to leave lending rates unchanged, Maoz estimated.

By year-end 2002, on the other hand, Maoz sees central bank lending rates dropping to 8.6%, and to 6.9% within 12 months.