Israeli currency swap forwards fell to the lowest in more than six months, suggesting the shekel will weaken over the next year, on bets the Bank of Israel will reduce the pace of interest rate increases as growth slows. The one-year swap forwards dropped eight basis points, or 0.08 percentage point, to 3.78 percent, the lowest level since Jan. 21 at 12 p.m. in Tel Aviv. The swaps were at 4.65 percent on April 21, the highest level since October 2008. The shekel weakened for a third day, declining 0.1 percent to 3.4661 per dollar. The currency has gained 8.6 percent over the past year. The Bank of Israel yesterday cut its forecasts for economic growth to 4.8 percent in 2011 and 3.9 percent in 2012 from 5.2 percent and 4.2 percent, respectively, saying debt reduction plans in developed countries may lead to a global slowdown. “Signs of the U.S. economy recovering at a slower pace is raising bets interest rates will stay low for a lot longer than previously anticipated, which means the Bank of Israel will raise its rate at a slower pace,” Amir Kahanovich, chief economist at Clal Investment Management Ltd. in Tel Aviv, said by telephone today. “Concern over economic growth and lower rates is boosting demand for the relative safety of long-term debt.” Interest Rate The benchmark Mimshal Shiklit government bond due in January 2020 rose, pushing the yield on the 5 percent notes down three basis points to 4.97 percent, the lowest since July 20. The yield on the 5.5 percent bond due in January 2022 fell three basis points to 5.16 percent. The interest rate will probably increase to an average 4.3 percent in the last quarter of 2012, the central bank said yesterday, predicting inflation of 3.5 percent this year and 2.6 percent in 2012. The bank left its main lending rate unchanged at 3.25 percent for a second time on July 25, after raising it four times this year. The CPI-linked bond due in June 2013 rose for the first time in four days, pushing the yield down three basis points to 0.96 percent. The two-year breakeven rate was at 264.1, implying trader expectations for an average yearly inflation rate of 2.64 percent over the period. To contact the reporter on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net To contact the editor responsible for this story: Claudia Maedler at cmaedler@bloomberg.net

Source