Israel Inflation Rate Hits Target, Setting Up Year-End Rate Hike

(Bloomberg) -- Annual Israeli inflation hit the government’s target for the first time in more than four years, drawing the Bank of Israel closer to its first interest rate increase since March 2015.

Prices rose 1.3 percent in June from a year earlier, the Central Bureau of Statistics in Jerusalem said on Sunday, beating the median estimate of 1.2 percent in a Bloomberg survey. The government’s inflation target is 1 percent to 3 percent, but since March 2014 price increases haven’t reached the band’s floor.

The central bank has held its benchmark rate at 0.1 percent for more than three years as inflation hovered near zero for much of that time, owing to a drop in energy prices, a strong currency and government measures to lower the cost of living. With global energy prices rising and economic growth exceeding forecasts, the bank’s research department now expects prices to rise 1.4 percent over the next 12 months, and the lending rate to inch up to 0.25 percent by year’s end.

In a May Bloomberg survey, the median estimate of economists was for a rate rise in the first quarter of next year.

With inflation finally accelerating again, bond yields had initially climbed on expectation that the Bank of Israel would adopt a more hawkish tone. But in its July 9 rate decision, the central bank clarified that inflation will first have to be within the target for more than just a few months. Markets interpreted that as a dovish message, and yields on 10-year bonds have tumbled 16 basis points since.

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