Increasing inflation expectations derived from the Israeli bond market may force the Bank of Israel to raise interest rates as soon as this month, according to Leader Capital Markets Ltd.
The spread between 2013 shekel-denominated bonds and inflation-linked bonds with a similar maturity has widened 44 basis points over the past two months to 297 basis points. That means investors are expecting inflation of about 2.97 percent in the next three years, the top of the 1 percent to 3 percent target range set by the Bank of Israel, headed by Governor Stanley Fischer.
“At these high inflation expectation levels, Fischer won’t have a choice but to increase interest rates,” Rafael Gozlan, chief economist at Leader said by telephone.
Fischer on June 28 held the benchmark interest rate at 1.5 percent for a third month citing increased uncertainties in the global economy, particularly in Europe, and their effect on Israel’s economy. There will be no change at the end of July, according to four of seven economists surveyed by Bloomberg. The remaining three expect a quarter-point increase.
Gozlan, who wasn’t included in the poll said it’s a “close call,” depending on inflation expectations and whether they continue to decline.
“The Bank of Israel is waiting to see if a decrease in expectations over past weeks becomes a trend so they can avoid the increase,” he said. The spread has narrowed 15 basis points from a peak of 310 basis points on July 6.
Inflation in June slowed to 2.4 percent from 3 percent in the previous month, the Central Bureau of Statistics said July 15. Consumer prices are expected to rise 2.7 percent in 12 months, according to a Bank of Israel survey of economists released yesterday.
The benchmark Mimshal Shiklit note due January 2020 rose 0.27 shekel to 105.53 at the close in Tel Aviv, pushing the yield on the 5 percent security down three basis points to 4.58 percent.
The shekel strengthened 0.3 percent to 3.8480 per dollar at 5:11 p.m. in Tel Aviv.