Israel Bonds Rise a Third Day as Inflation Confirms Rate Bets

Israeli government bonds gained for a third day as in-line inflation and slower economic growth increased expectations the central bank will leave its main lending rate unchanged next week.

The yield on the benchmark 5 percent Mimshal Shiklit bond due January 2020 dropped two basis points, or 0.02 percentage point to 4.98 percent, the lowest since Feb. 15, at the 4:30 p.m. close in Tel Aviv. The rate declined 11 basis points last week before the Central Bureau of Statistics said July 15 the consumer-price index advanced 0.4 percent in June from the previous month, while annual inflation accelerated to 4.2 percent from 4.1 percent.

The CPI was pretty much as expected and “confirms the knowledge that the Bank of Israel won’t raise the interest rate at as fast a pace as in the first half of the year,” Ori Greenfeld, macro economist at Psagot Investment House Ltd. in Tel Aviv, said by telephone.

The central bank kept the benchmark lending rate at 3.25 percent in June after four increases this year, citing concern about slower U.S. economic growth and rising debt risk in Europe. The rate is expected to climb gradually to about 4.1 percent in 12 months, according to an assessment by Bank of Israel research staff that was contained in the minutes of the June 27 rate-setting meeting.

The bank will leave the rate unchanged at its next meeting July 25, according to 14 of 16 economists surveyed by Bloomberg.

Slower Growth

The economy expanded an annualized 4.6 percent in the first quarter, slower than the previously estimated 4.8 percent, the Jerusalem-based Central Bureau of Statistics said today. Growth eased from a revised 7.7 percent in the fourth quarter, the fastest in four years.

“Compared with the rest of the world, the Israeli economy is growing at a sound rate,” Greenfeld said. “Still, Israel is a country dependent on exports and its economy is going to be affected by a slowdown in the global economy since its main trading partners are the U.S. and Europe.”

Economic growth in Israel may be slower in 2011 than the central bank’s forecast of 5.2 percent because expansion in the second quarter may have been less than expected, Bank of Israel Governor Stanley Fischer said July 7. Imports declined for the first time in four months in June, the statistics bureau said July 11. Government revenue in June was 15 billion shekels ($4.4 billion), 1.1 billion shekels below the government forecast, the Finance Ministry said July 6.

The shekel weakened 0.4 percent to 3.4380 per dollar on July 15. It has strengthened 2.5 percent this year.

To contact the reporters on this story: Susan Lerner in Jerusalem at slerner2@bloomberg.net; Sharon Wrobel in Jerusalem at swrobel4@bloomberg.net

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

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