Bloomberg News

Israel 1-Year Swaps Signal Central Bank May Lower Interest Rates

May 16, 2012

Israel’s one-year interest-rate swaps fell to the lowest level in more than three months and government bonds rose on speculation slowing economic growth will prompt the central bank to lower borrowing costs.

The contracts, an indicator of investor expectations for the benchmark interest rate in the next 12 months, dropped one basis point, or 0.01 percentage point, to 2.39 percent, at the 4:30 p.m. close in Tel Aviv, matching the low on Feb. 15. The rate has retreated 21 basis points this month. The yield on the 5 percent Mimshal Shiklit notes due March 2013 declined one basis point to 2.47 percent, the lowest since Feb. 7.

The economy grew an annualized 3 percent in the first quarter, the slowest pace since the three months ended June 2009, the Jerusalem-based Central Bureau of Statistics said today. The median estimate in a Bloomberg survey of 11 economists was 2.5 percent. The Bank of Israel, which held the benchmark interest rate at 2.5 percent for a third month on April 23, will meet to set monetary policy on May 28.

“The growth figure was better than anticipated but there is still a slowdown in the economy,” said Amir Haik, chief economist at Union Bank of Israel (UNON) Ltd. in Tel Aviv. “A deterioration in the eurozone economy will impact the country’s exports and may prompt the Bank of Israel to lower interest rates in the coming months.”

Inflation Forecasts

A Greek caretaker government agreed on today will prepare new elections probably on June 17, said Greece’s Democratic Left leader Fotis Kouvelis amid concern the country will abandon the euro common currency. Economic growth in Israel, which exports almost 60 percent of its goods to the euro region and the U.S., is expected to slow to 3.1 percent this year from 4.8 percent in 2011, according to central bank estimates.

Rafael Gozlan, chief economist at I.B.I.-Israel Brokerage & Investments Ltd. in Tel Aviv, reduced his inflation forecast to 1.8 percent in the next 12 months from 2.4 percent, according to an e-mailed report today.

The one-year break-even rate, the yield difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, fell eight basis points to 219, implying an average annual inflation rate of 2.19 percent, the lowest in more than three months.

The Tel Aviv Bond 40 Index, a measure of inflation-linked and fixed-rate corporate bonds, dropped 0.3 percent to 262.58, the lowest level since March 29. The shekel gained 0.2 percent to 3.8247 a dollar at 4:50 p.m. in Tel Aviv.

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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