Bloomberg News

Israel Inflation Expectations Fall to Two-Week Low on Rate Bets

December 15, 2011

Dec. 14 (Bloomberg) -- Israel’s inflation expectations fell to the lowest level in almost two weeks on bets the pace of interest rate cuts will slow as the current account bounced back into surplus.

The two-year breakeven rate, the difference between inflation-linked bonds and similar-maturity fixed-rate government debt, dropped 13 basis points to 209 at the 4:30 p.m. close in Tel Aviv, the lowest since Dec. 1. That implies an average annual inflation rate of 2.09 percent.

Israel’s current account returned to a surplus after showing its first deficit since 2008, the Jerusalem-based Central Bureau of Statistics said today, as the trade deficit narrowed. The central bank cut the benchmark interest rate to 2.75 percent for the second time in three months on Nov. 28 as the European debt crisis weighed on the country’s economy.

“The surplus is a bit surprising and indicates that Israeli exports were not hit yet as much as was expected by the growth slowdown in Europe,” Yaniv Hevron, head of macro- strategy at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel, said by telephone. “As a result, the Bank of Israel may not need to rush to cut interest rates at the end of the month.”

Europe is one of Israel’s main trading partners, and exports account for almost 40 percent of the country’s gross domestic product. The seasonally-adjusted surplus was $586 million in the three months through September compared with a revised deficit of $247 million in the previous quarter.

Annual Surplus

The surplus comes after Bank of Israel Governor Stanley Fischer said Nov. 15 that the current account is likely to show a deficit of 1 percent of gross domestic product this year and 1.4 percent next year, after showing an annual surplus since 2003.

The statistics bureau will probably report tomorrow that annual inflation accelerated to 2.8 percent in November from 2.7 percent in October, according to the median estimate of 11 economists surveyed by Bloomberg. The shekel weakened 0.2 percent to 3.8067 against the dollar, bringing the monthly decline to 1.3 percent.

The yield on the 5.5 percent notes due January 2022 declined two basis points to 4.70 percent. Israel posted a $212 million deficit in trade in goods and services in the third quarter compared with a $692 million shortfall in the previous quarter, the bureau said today.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell two basis points to 2.63 percent. The Bank of Israel will hold its key lending rate at 2.75 percent on Dec. 26, according to 11 out of 14 analysts in a Bloomberg survey. The remainder expect borrowing costs to fall by 25 basis points to 2.5 percent.

The Tel Aviv Bond 40 Index, which comprises both inflation- linked and fixed-rate corporate bonds, dropped for a third day, declining 0.3 percent.

--Editors: Ash Kumar, Alex Nicholson, Louis Meixler, Linda Shen.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net

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


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