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Shekel Weakens, Benchmark Yield Falls on Central Bank Rate Bets

May 22 (Bloomberg) -- Israel’s shekel weakened to a two-month low and government bonds rose on investor bets the central bank will cut interest rates next week for a second time this month.

Bank of Israel Governor Stanley Fischer used his tie-breaking vote for the first time to restrict last week’s rate cut to 0.25 percentage point, as half the bank’s monetary panel pressed for a 50-basis-point reduction, according to the minutes of the decision released today. Committee members who supported Fischer argued the “moderate reduction” would be sufficient until the next meeting on May 27 when “the effect of this reduction would be analyzed,” the bank said.

The shekel dropped as much as 1.1 percent to 3.7017 a dollar, the lowest since March 18, before trading at 3.6836 at 5:12 p.m. in Tel Aviv. The yield on the 4.25 percent notes due in March 2023 slumped eight basis points, or 0.08 percentage point, matching the decline on April 29, to 3.49 percent.

The divide “increases the likelihood that the central bank will follow on and further lower rates as early as next week,” Sagie Poznerson, head of trading at Leader Capital Markets Ltd. in Tel Aviv, said by phone. “The low-inflation environment also supports another rate-cut.”

To stem the shekel rally and bolster exports, which make up 40 percent of economic output, the Bank of Israel on May 13 unexpectedly cut interest rates to 1.5 percent, a three-year low, and announced a program to buy foreign currency. Since then the shekel has fallen 3 percent.

Bank Credibility

“Last week’s rate cut and commitment to FX intervention successfully weakened the shekel, but a further cut next week would support the bank’s credibility”, David Lubin, chief emerging-markets economist at Citigroup, wrote in an e-mailed report today. He sees a “strong possibility” of another cut later in the year.

The shekel has risen 5.1 percent in the past six months, making it the second-best performer after the Mexican peso among 31 major currencies tracked by Bloomberg. Annual inflation slowed to 0.8 percent last month, falling below the government’s 1 percent to 3 percent target for the first time since July 2007, the statistics bureau said May 14.

The central bank will lower borrowing costs to 1.25 percent at its meeting on May 27, according to seven of 18 analysts in a Bloomberg survey. The remainder expect no change. One-year interest swaps, an indicator of investor expectations for rates over the period, declined 6.5 basis points to 1.26 percent.

To contact the reporter on this story: Sharon Wrobel in Tel Aviv at

To contact the editor responsible for this story: Claudia Maedler at

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