Inflation Forecasts Spike on BoI Moves

Market expectations for 12-month forward inflation in Israel appear to be on the rise. Comparison between consumer price index-linked government bonds and shekel bonds reveals that for the first time in a long while the market is expecting an inflation rate of 4%.

The difference between 1-year CPI-linked bonds and 1-year makam (T-bills) reflects expectations of a 4% inflation. Earlier this week expectations had been just 3.75%. 2-year bonds point to inflation of 3.79%, against 3.66% Sunday, while 3-year bonds reflect inflation expectations of 3.86%. At the beginning of the week 10-year bond prices indicated that the public was expecting inflation of 2.76%.

Capital market sources said today that the biggest factor boosting inflation is the Bank of Israel's massive intervention in foreign currency trade. The central bank bought more than $1.5 billion in the last three days, pouring nearly NIS 6 billion into the market, in addition to existing local supply. Dollar sellers typically deposit their shekels with commercial banks or purchase government bonds.

Economists ascribe re cent inflation mainly torising prices and taxes, along with the increasing price of commodities worldwide, and optimistic public sentiment fueling consumption and stock purchases.

The last two months, for instance, have seen a dramatic increase in real estate prices in the central part of the country. Market sources also say that July's cost of living index, which will be announced on August 15, will be more than 1%, and that the announcement itself will add fuel to future inflationary expectations.