Israel’s Shekel Weakens as Deficit Boosts Rate Bets

(Corrects lead to say central bank may cut rates this month.)

Israel’s shekel weakened as the country’s budget deficit more than doubled amid a decline in tax revenue, boosting speculation the central bank may lower interest rates this month.

The shekel lost 0.3 percent to 3.6903 per dollar at 12:13 p.m. in Tel Aviv, bringing the drop this month to 1.7 percent. The currency may weaken to 3.77 per dollar in coming weeks, according to Adiv Kabiri, senior currency dealer at Gift Asset Management Ltd. in Tel Aviv.

“A higher deficit and lower tax revenue in October are further signs that growth in the economy is slowing down and exports are suffering from the problems in the global economy,” Kabiri said by telephone. “The deficit increases the likelihood that the Bank of Israel will cut interest rates at the end of the month.”

The central bank on Oct. 24 left its benchmark lending rate for November at 3 percent following a 25 basis-point cut the previous month, saying it has “room to respond” to events in the global and local economies. Exports make up about 40 percent of Israel’s economy, with the U.S. and Europe being the largest markets.

The deficit widened to 4 billion shekels ($1.1 billion) in October from a revised 1.7 billion shekels a month earlier, the Finance Ministry said in an e-mailed statement today. Overall tax revenue fell 12 percent to 15.5 billion shekels, it said.

Rate Expectations

Two-year interest rate swaps, an indicator of investor expectations for the benchmark in the next two years, fell four basis points to 2.72 percent. Ten analysts in a Bloomberg survey on Oct. 28 were evenly split about the course the central bank will take at its next meeting on Nov. 28 with five predicting a cut to 2.75 percent and five expecting no change to the rate.

There is a 58 percent chance the shekel will reach 3.77 by Dec. 31, according to implied probability calculated from currency options. Fourth-quarter forecasts for the shekel range from 3.40 to 3.90 a dollar, with a median estimate of 3.65, according to the estimates from nine banks on Bloomberg.

The benchmark Mimshal Shiklit bond due in January 2022 rose for a sixth day, pushing the yield on the 5.5 percent note down two basis points, or 0.02 percentage point to 4.51 percent, the lowest level since the bonds were issued in April.

The yield on consumer price-linked notes due June 2013 was little changed at 0.92 percent. The two-year breakeven rate, the yield difference between the inflation-linked bond and fixed- rate government bonds of similar maturity was little changed at 188 basis points. That implies an average annual inflation rate of about 1.88 percent over the period.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, slipped 0.1 percent.

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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