Bank of Israel updates inflation expectations series with one-year market breakeven at 1.6 percent

The Bank of Israel published an updated statistical series on expected inflation derived from multiple sources, combining capital-market breakeven inflation measures with survey-style forecast averages, bank-internal interest rate implied expectations, and inflation contract quotes. The latest “current data” show one-year inflation expectations of 1.6 percent from the capital market, 1.9 percent from the average of professional forecasts, and 2.1 percent from both internal interest rates and inflation contracts, alongside forward market-based measures of 2.0 percent for the second year, 2.5 percent for the third year, 2.2 percent for years 3–5, 1.9 percent over five years, and 1.9 percent for years 5–10 forward. Market-based expectations are defined as breakeven inflation, calculated from the yield differential between nominal government bonds and Consumer Price Index (CPI)-indexed government bonds, and are noted as incorporating an inflation-risk premium and potential biases related to taxation, liquidity and market depth. The release also sets out the construction of forward expectations from breakeven rates, explains that the forecast measure is the simple average of forecasts submitted regularly to the Bank of Israel by commercial banks and economic consultancies, and describes internal-rate expectations as derived from the five large banks’ internal funding and lending marginal pricing (unindexed versus CPI-indexed); it flags that, in the Bank’s assessment, one-year-horizon market-based biases were greater than usual in January 2024.