Bank of Israel updates inflation expectation indicators with one-year breakeven inflation at 1.7%

The Bank of Israel published updated indicators of expected inflation derived from multiple sources, including capital-market breakevens, the average of professional forecasts, banks’ internal interest rates and inflation contracts, with market-based measures spanning one-year expectations and forward rates out to 10 years. The “current data” show one-year breakeven inflation at 1.7%, alongside 2.2% for the average 12‑month-ahead forecast, 1.9% implied by banks’ internal interest rates and 2.0% from inflation contracts; the market-implied five-year expectation stands at 1.9% and the five-to-10-year forward expectation at 2.3%. Breakeven inflation is defined as the yield differential between unindexed and CPI-indexed Israeli government bonds and therefore includes an inflation-risk premium and potential biases from differences in taxation, liquidity or market depth, with the Bank noting that one-year-horizon biases were greater than usual in January 2024. Forward expectations are derived from breakeven rates for different horizons (for example, years 3–5 and years 5–10), while the forecast series is a simple average of projections provided regularly by commercial banks and economic consulting companies; internal-rate expectations are calculated from the five large banks’ unindexed versus CPI-indexed internal rates (based on marginal funding and lending prices), and inflation-contract expectations are based on average market quotes, with “current data” generally taken as CPI-month averages around the latest CPI release.