JERUSALEM, Jan 15 (Reuters) - The Bank of Israel remains concerned about a re-emergence of inflation, partly due to the ongoing war with Hamas, despite cutting rates for the first time in nearly four years this month, minutes of the discussion showed on Monday.

The 25 basis point reduction on Jan. 1 that took the central bank's benchmark interest rate to 4.5% was somewhat expected and supported by all five members of the monetary policy committee (MPC).

Policymakers cited moderating inflation with the headline rate dipping to 3.3% year-on-year in November and expectations of a return to its 1-3% target in the first quarter, as slowing global activity helps ease imported price pressures.

MPC members nonetheless emphasised the risk of another pick up in inflation due to factors such as the effects of the war and its development on economic activity as well as a depreciation of the shekel.

Another risk, they added, is the inflationary impact of fiscal expansion to fund defence and civilian expenditure, if not offset by cuts elsewhere.

Israel's cabinet on Monday approved an amended 2024 budget adding 55 billion shekels ($15 billion) of extra spending, mainly to finance the war with Palestinian Islamist group Hamas and compensate citizens affected by the Oct. 7 attacks by their gunmen. The boost is projected to push the budget deficit to around 7% of gross domestic product.

Bank of Israel officials have cautioned that looser fiscal policy would likely slow the pace of rate cuts.

"There's always a balance between monetary policy and fiscal policy. If fiscal policy is more expansive then monetary policy probably needs to take that into account," Deputy Governor Andrew Abir told Reuters after the rate cut.

The central bank's decision to cut rates for the first time since 2020 came after four meetings where it held rates following 10 straight increases that lifted the policy rate from 0.1% in April of 2022.

"In view of the war, the monetary committee’s policy is focusing on stabilising the markets and reducing uncertainty, alongside price stability and supporting economic activity," it said.

The central bank said there had been a gradual recovery in activity after an initial sharp decline in the wake of Oct. 7, but it was too soon to determine whether "supply shocks are dominant over demand".

($1 = 3.7493 shekels) (Reporting by Steven Scheer Editing by Bernadette Baum, Kirsten Donovan)