By David Wainer and Tal Barak Harif, www.Bloomberg.com
Israel’s benchmark bonds are poised to fall, pushing yields up as much as 0.4 percentage point, as the central bank persists in raising interest rates to curb inflation, according to Excellence Investments Ltd.
The yield on the shekel-denominated bond due February 2017 may climb to 4.8 percent over the next 12 months from 4.38 percent yesterday, said Shlomo Maoz, the Ramat Gan, Israel-based brokerage’s chief economist. The benchmark Mimshal Shiklit security fell was unchanged at 110.87 at the close in Tel Aviv and the yield one basis point to 4.39 percent.
“The bank still has to rein in inflation,” said Maoz, one of two economists to predict the August rate increase, the first by a central bank since the global economy began to recover. “It’s very cheap to borrow in Israel and the real interest rate, taking inflation into account, is still very low.”
Inflation accelerated in October to 2.9 percent from 2.8 percent the previous month, the Central Bureau of Statistics said on Nov. 15. The inflation rate will rise to as high as 3.7 percent two months from now, above the 3 percent upper end of the government’s target range, according to Arie Tal, the chief strategist at Alumot- Sprint Investment House, who forecast yesterday’s increase.
Bank of America Corp. expects Israeli central bank Governor Stanley Fischer to increase the benchmark interest rate to 1.25 percent by year-end, according to an Oct. 30 report.
Fischer, 66, raised the lending rate by a quarter of a percentage point yesterday to 1 percent following a similar move in August. Twelve of 17 economists surveyed by Bloomberg, including Maoz had forecast no change yesterday. Five had predicted the increase.
The shekel was little changed, dropping 0.3 percent to 3.7822 per dollar at 5:21 p.m. in Tel Aviv. The currency jumped yesterday following the rate increase, climbing to as high as 3.7685 per dollar, a 1 percent increase.
“This is a momentary reaction by the market to a surprise move,” said Yaron Chechik, a currency trader at Financial Immunities Ltd. in Rehovot, Israel. “The higher rates make Israeli yields more appealing. In the long-term, the shekel will follow the global trend of risk appetite.”
The benchmark Mimshal Shiklit bond last yielded about 4.8 percent on Aug. 31, up from a record low of 4.1 percent on Feb. 17.
The economy grew an annualized 2.2 percent in the third quarter, its fastest pace in more than a year, after expanding 1 percent in the second quarter. The bank expects economic growth to accelerate to 2.5 percent next year from zero expansion in 2009.
The Washington-based International Monetary Fund is forecasting growth of 0.5 percent and average annual inflation of 1.1 percent next year in the European Union. U.S. gross domestic product should expand 1.5 percent and inflation average 1.7 percent in 2010, according to the IMF.
Israel’s decision to increase rates “will help to establish inflation one year ahead firmly within the target range,” the bank said in its statement. “National accounts data for the third quarter indicate recovery in economic activity, reflecting a significant increase in private consumption, exports and investments.”
The government’s annual target is for 1 percent to 3 percent inflation.
“The Bank of Israel still has a loose monetary policy, while at the same time signaling that they are serious about fighting inflation,” said Tevfik Aksoy, a London-based economist for Morgan Stanley, who forecast the increase. “The decision won’t hinder growth at all.”