Israel's Inflation Expectations See Slight Rise in October

Inflation expectations in Israel for the upcoming year have slightly increased in October, according to data released by the Bank of Israel. Expectations derived from the capital market rose to 1.7% for the next year, up from 1.6% in September. The central bank's monthly report also indicated that the average inflation expectations for the next 12 months, as reported by commercial banks and economic consulting firms, climbed to 2.1% from 2% the previous month. Expectations based on internal bank interest rates remained steady at 1.9%.

For the second and third years ahead, inflation expectations from the capital market held at 2.1%, while five-year expectations remained unchanged at 1.9%. Expectations for the period between the third and fifth years also stabilized at 1.9%. However, expectations for the period between the fifth and tenth years increased to 2%, up from 1.9% in September.

Inflation expectations for the next year, based on forecasters' estimates, stayed at 1.9%. The Bank of Israel noted that while some short-term inflation indicators showed a limited rise, expectations for longer periods remained stable, with no significant shifts in the overall trend.

On an annual basis, capital market expectations for 2025 are projected at an average of 1.8%, a decrease from 2.8% in 2024 and 2.3% in 2023. Similarly, average expectations from commercial banks and consultants for the next 12 months are forecast at 2.3% for 2025, down from 2.9% in 2024.

The Bank of Israel derives capital market inflation expectations from the yield difference between inflation-linked and non-linked government bonds. It also considers estimates from financial institutions, inflation forecasters, and major banks' interest rates. The bank clarified that capital market expectations include risk premiums related to inflation, tax differences, and liquidity levels across various bond types, not solely inflation forecasts.