Bloomberg News

Israel Inflation Expectations Decline Before Vote on Cost Cuts

October 03, 2011

Oct. 3 (Bloomberg) -- Israeli inflation expectations retreated to the lowest level in two weeks as the government debates recommendations to bring down living costs and after food manufacturers cut some prices.

The two-year breakeven rate, which reflects market expectations for inflation over the period, tumbled 14 basis points, or 0.14 percentage point, to 179 at the 4:30 p.m. close in Tel Aviv, implying an average annual inflation rate of 1.79 percent. Inflation-linked bonds due June 2013 fell for a second day, pushing the yield up 10 basis points to 1.16 percent. Demand for inflation-linked bonds at a Finance Ministry debt auction today declined.

The Cabinet may decide as early as today on recommendations of a panel appointed by Prime Minister Benjamin Netanyahu in response to consumer protests that brought hundreds of thousands to the streets in the past few months. Strauss Group Ltd., which derives about a fifth of its revenue from dairy products, said yesterday it would lower some of its milk products’ prices 12 percent. Tnuva Food Industries Agricultural Co-Op In Israel Ltd. yesterday said it would cut the prices it recommends supermarkets charge for some dairy products.

Slowing Inflation

“Because of the issue of lower prices, mainly of food prices, the market thinks coming inflation indexes will be weak,” Assaf Rosenberg, head of fixed-income sales at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel, said by telephone.

Annual inflation slowed to 3.4 percent in August from a high this year of 4.3 percent in March. Consumer prices are expected to rise 2.3 percent in the next 12 months, according to the average of forecasters surveyed by the Bank of Israel, the bank said Sept. 20. Inflation has been above the government’s 1 percent to 3 percent target range since the start of the year.

The Finance Ministry raised 1.4 billion shekels ($373 million) at debt auctions today, including 200 million shekels of 1.5 percent CPI-linked bonds due in June 2014. The sale of inflation-linked securities was four times oversubscribed compared with six times at a sale of the bonds last week. The auctions also included 250 million shekels of 5.5 percent bonds due January 2022, which were sold at an average price of 109.67. That sale was 5.7 times oversubscribed compared with 4.9 times for last week’s sale, which priced at 108.94.

Better Price

The 5.5 percent Mimshal Shiklit notes increased to 109.98, pushing the yield down four basis points to 4.6 percent. The price rose because the “auction price closed at a better than market price,” Rosenberg said.

Expectations of a global slowdown and a sharp decline in commodity prices are also lowering inflation expectations, Ori Greenfeld, head of the macro research department at Psagot Investment House Ltd. in Tel Aviv said by telephone.

Fitch Ratings today lowered its 2011 world economic growth forecast to 2.6 percent from 3.1 percent and its 2012 estimate to 2.7 percent from 3.4 percent. Israel’s central bank on Sept. 22 reduced its 2012 growth forecast to 3.2 percent from 3.9 percent, citing increased uncertainty about the global economy and a decline in the rate of growth in world trade.

Commodities fell to a 10-month low on speculation a Greek default would slow global growth and curb demand for raw materials. Oil for November delivery declined as much as 3 percent to $76.85 a barrel. Crude lost 17 percent last quarter.

The shekel slipped 0.1 percent to 3.7540 per dollar at 5:25 p.m. in Tel Aviv. Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, rose one basis point to 2.76 percent. The Tel Bond 40 index of corporate bonds dropped 0.3 percent.

--Editors: Susan Lerner, Shanthy Nambiar

To contact the reporter on this story: Shoshanna Solomon in Tel Aviv at ssolomon22@bloomberg.net

To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net


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