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Israel Inflation Expectations Plunge as Government Approves Plan

Israeli inflation expectations declined to the lowest level in more than three weeks after the cabinet approved proposals from the government-appointed Trajtenberg committee to address cost-of-living complaints.

The two-year breakeven rate, which reflects market expectations for inflation over the period, slid six basis points, or 0.06 percentage point, to 173 at the 4:30 p.m. close in Tel Aviv, the lowest since Sept. 15. That implies an average annual inflation rate of 1.73 percent. Inflation-linked bonds due June 2013 rose, pushing the yield down three basis points to 1.09 percent.

The Cabinet approved the panel’s recommendations, including easing import restrictions and boosting the supply of affordable housing, by a 21 to eight vote today, according to a text message from the office of Prime Minister Benjamin Netanyahu. The panel led by economist Manuel Trajtenberg drafted the proposals in response to social protests that drew hundreds of thousands of Israelis to the streets this summer to protest the high cost of living and lack of affordable housing.

“The Trajtenberg proposals will lower prices modestly over the medium term,” Jonathan Katz, a Jerusalem-based economist for HSBC Holdings Plc, said by telephone today. “More than anything, the social protests that are putting pressure on the chain stores have had more of an impact on lowering food prices.”

Dairy Prices

The demonstrations and boycotts, which started in June over the cost of cottage cheese, prodded Tnuva Food Industries Agricultural Co-Op In Israel Ltd., which controls about 70 percent of the dairy market, to cut recommended selling prices by as much as 15 percent last week. Competitor Strauss Group Ltd. followed with reductions of 12 percent on some of its milk products. Strauss shares declined 2.1 percent.

Food costs fell 0.2 percent in August after declining 0.6 percent in July, according to the Central Bureau of Statistics. Consumer prices in September will be unchanged from August, according to the median estimate of 13 analysts in a Bloomberg survey. Katz, forecasts an 0.1 percent increase. Annual inflation will slow to 3.2 percent from 3.4 percent, according to the survey. The statistics bureau will release the figures Oct. 14.

On Hold

Israel’s benchmark government bonds declined for a second day before a planned Finance Ministry auction of 1.55 billion shekels ($417 million) of debt tomorrow. The yield on the 5.5 percent Mimshal Shiklit bond due January 2022 increased three basis points to 4.57 percent.

“People aren’t buying today, waiting for tomorrow’s sale,” Assaf Rosenberg, head of fixed-income sales at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel, said by telephone. A decline in tax revenue and rising Treasury yields also are continuing to have an affect on bond prices, he said.

Israel posted a budget deficit of 1.6 billion shekels in September as direct taxes, which have shown a “declining trend” since June, slid 2 percent from a year earlier, the Finance Ministry said Oct. 6.

Tomorrow’s bond auction will include 200 million shekels of 2.75 percent inflation-linked bonds due in 2041, according to Finance Ministry data posted on Bloomberg. The government plans to raise 6 billion shekels from debt sales this month.

Rate Cut

The Tel-Bond 40 index of corporate bonds declined 0.3 percent.

The shekel weakened the first time in four days on Oct. 7, slipping less than 0.1 percent to 3.7165 per dollar. Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, were unchanged at 2.68 percent.

Bank of Israel Governor Stanley Fischer cut the benchmark interest rate by a quarter point to 3 percent on Sept. 26 as inflation slowed, growth eased and Europe, one of the country’s key export markets, grappled with its debt crisis.

“We see a stable rate in November and a cut for December to 2.75 percent,” Ron Eichel, chief economist at Meitav Mutual Fund Management in Tel Aviv said by telephone today.

Goldman Sachs said Sept. 27 the benchmark lending rate may decline to 2.5 percent by year end, while Citigroup Inc. has forecast another quarter-point cut this year.

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