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Shekel Gains First Time in 3 Days After Central Bank Holds Rates

The shekel strengthened for the first time in three days after the Bank of Israel kept interest rates unchanged and the unemployment rate fell to the lowest since at least 1985.

The shekel increased 0.1 percent to 3.7889 a dollar at 4:33 p.m. in Tel Aviv, trimming this month’s loss to 1.3 percent. It had gained as much as 0.3 percent earlier. The central bank left its benchmark lending rate at 2.5 percent late yesterday, saying “indicators of real economic activities are consistent with the Bank of Israel forecast of growth of about 2.8 percent in 2012.”

The Bank of Israel had reduced the rate three times in the past five months, including a 25 basis-point cut last month. The decision to hold rates, predicted by all 24 economists in a Bloomberg survey, kept the spread between Israeli and U.S. rates steady. The Federal Reserve said in January it may need to keep interest rates near zero through at least late 2014.

“As a result of the central bank’s decision the rate differential with the U.S. is not narrowing as in previous months, which gives the shekel some support today,” said Eytan Admoni, head of the international department at Bank of Jerusalem Ltd.

The jobless rate was 5.4 percent in the three-month period ending Dec. 31, down from a seasonally adjusted 5.6 percent in the third quarter, the Central Bureau of Statistics said today on its website.

U.S. Data

The one-year breakeven rate, the yield difference between the inflation-linked bond and fixed-rate government bonds of similar maturity, rose six basis points to 275, the highest since July 31. That implies an average annual inflation rate of about 2.75 percent. The yield on 1.5 percent inflation-linked bonds due June 2014 fell seven basis points to 0.13 percent, the lowest since the notes were issued in April 2009.

The central bank held its base lending rate as U.S. economic data this month “continue to be encouraging” and inflation expectations increased. In the U.S., data last week showed jobless benefits applications stayed at the lowest level since 2008, consumer confidence increased to a one-year high and purchases of new homes exceeded economists’ forecasts. About 40 percent of Israel’s gross domestic product is made up of exports, with the U.S. and Europe the largest markets.

Stabilizing Economy

“The central bank is likely to leave interest rates unchanged in coming months as inflation expectations climb and local economic indicators are stabilizing,” said Yaniv Hevron, head of macro-strategy at Excellence Nessuah Investment House Ltd. in Ramat Gan, Israel.

One-year interest rate swaps, an indicator of investor expectations for the benchmark rate in the period, fell less than one basis point to 2.45 percent. The rate has advanced 11 basis points this month, headed for the biggest monthly increase since March last year. The yield on the benchmark 5.5 Mimshal Shiklit bond due January 2022 declined two basis points to 4.63 percent.

The Tel Aviv Bond 40 Index, which measures inflation-linked and fixed-rate corporate bonds, gained 0.1 percent to 263.07.

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