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Israel Inflation Bets Rise to One-Month High on Climbing Prices

Jan. 12 (Bloomberg) -- Israeli inflation expectations rose to the highest level in almost a month amid investor bets electricity and housing costs will push consumer prices higher.

The two-year break-even rate, the rate difference between inflation-linked bonds and fixed-rate government bonds of similar maturity, gained one basis point, or 0.01 percentage point to 202 at the 4:30 p.m. close in Tel Aviv. That implies an average annual inflation rate of 2.02 percent. The level is the highest since Dec. 15, before a report that day showed November inflation eased to its slowest pace in a year.

Israeli consumer prices likely rose 0.1 percent last month after declining 0.1 percent in November, according to the median estimate of 11 economists in a Bloomberg survey. The statistics bureau is scheduled to release last month’s data on Jan. 15.

“We recommend investors to buy shorter-term CPI bonds instead of shorter-term non-linked notes as prices over the next year are set to increase above expectations and interest rate bets are already priced in,” said Shuki Arditi, a bond trader at Leader Capital Markets Ltd. in Tel Aviv. “A rise in electricity and rental prices are expected to increase inflationary pressure over the next year.”

Inflation Expectations

Leader Capital Markets raised its inflation forecast for this year to 2.7 percent from 2.5 percent on expectations that electricity costs will increase 9 percent in February. The yield on the 5 percent bonds due March 2013 rose one basis points to 2.46 percent and the yield on the CPI-linked bond due June 2013 was little changed at 0.44 percent, near the lowest since March.

The yield on the 5.5 percent notes due January 2022 fell for a fourth day, dropping three basis points to 4.47 percent. The country’s trade deficit narrowed in December as imports declined and exports rose. The deficit, excluding polished diamonds, ships and aircraft, declined to a seasonally adjusted $1.25 billion, from a revised $1.54 billion the previous month, the statistics bureau said today. For the year, the deficit rose 87 percent to $15.9 billion.

The Bank of Israel cut its estimate for economic growth this year to 2.8 percent from 3.2 percent on Dec. 26 citing an “expected slowdown in the growth of all components of demand,” as the debt crisis in Europe weighs on the global economy. The central bank on Dec. 26 left its main lending rate unchanged at 2.75 percent, after reducing it twice in three months, saying it wants to be able to react to future developments.

Two-year interest-rate swaps, an indicator of investor expectations for rates over the period, fell for a second day, declining three basis points to 2.48 percent.

The shekel strengthened 0.5 percent to 3.8286 a dollar at 5:34 p.m. in Tel Aviv. The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, gained for a sixth day, advancing 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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