Bloomberg News

Israel Inflation Expectations Rise to 3-Month High on Tax Rise

December 07, 2011

Dec. 6 (Bloomberg) -- Israel’s inflation expectations rose to the highest level in more than three months after lawmakers raised corporate taxes, fueling investor concern consumer prices may increase.

The two-year breakeven rate, which reflects market expectations for inflation over the period, rose three basis points, or 0.03 percentage point, to 219 at the 4:30 p.m. close in Tel Aviv, the highest since Aug. 30. That implies an average annual inflation rate of 2.19 percent. Inflation-linked bonds due June 2013 rose, pushing yields down two basis points to 0.568 percent.

Israel’s parliament, or Knesset, yesterday boosted corporate tax rates for companies and high earners as part of measures aimed at reducing the cost of living for the poor and middle class. The tax for companies was raised to 25 percent from 24 percent, while families will receive a tax credit of 418 shekels ($112) a month for each child. The new measures take effect on Jan. 1.

“Raising taxes on companies may hurt their earnings and as a result they may need to raise prices,” Amir Kahanovich, chief economist Clal Finance Brokerage Ltd. in Tel Aviv, said by telephone. “The tax changes may also deter foreign companies from investing in Israel after the government previously had a plan to lower corporate taxes.”

Tax Credit

Prime Minister Benjamin Netanyahu proposed the tax package after demonstrators during the summer calling for lower prices, more affordable housing and free pre-school education. Netanyahu appointed a committee led by economist Manuel Trajtenberg that recommended the tax changes, along with other proposals, including a cut to the defense budget.

The steps approved yesterday include raising the income-tax rate for those who earn at least 1 million shekels a year to 48 percent from 45 percent. A gasoline tax increase will be scrapped.

Israel posted a November budget deficit of 800 million shekels as revenue from income taxes declined, the Finance Ministry said in an e-mailed statement today. The revenue shortfall for the first 11 months of the year was 3.3 billion shekels, most of which was due to tax collection in the past three months.

The Tel-Bond 40 index of corporate bonds gained 0.2 percent to 255.88. The shekel weakened 0.2 percent to 3.7450 against the dollar as of 4:37 p.m. The yield on the benchmark bonds due January 2022 advanced one basis point to 4.71 percent.

The Bank of Israel sold 1.5 billion shekels in Makam bills due February 2012 at an average yield of 2.7 percent at an auction today. The central bank also issued 11.5 billion shekels in one-year bills due December 2012 at an average yield of 2.8 percent compared with 2.86 percent at a Nov. 1 sale of similar maturity securities.

--Editors: Shanthy Nambiar, Claudia Maedler

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at

To contact the editor responsible for this story: Claudia Maedler at

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