The International Monetary Fund has lowered growth prospects for Israel's economy in 2008 year to 3.5 percent from 4%, citing slowing demand from export partners, while praising the country's "exceptional" economic performance over the past year. "Economic activity is widely expected to remain strong, even if somewhat less buoyant than in recent years. Slowing demand from Israel's export partner countries is projected to reduce output growth in 2008 to around 3.5%," the IMF said in its 2007 country report for Israel published on Thursday. "The economy is performing exceptionally well, but still high public indebtedness leaves the economy vulnerable and calls for the continuation of strong economic policies." The report noted that, in particular, decelerating activity in the US and Europe will weigh on exports and investment. In December, the IMF forecasted real GDP growth of 4% in 2008, compared with about 5.5% in 2007. "The economy is entering the global slowdown with significant momentum," the report said. "The global financial turmoil has caused some increase in risk premia, but has not prompted significant concerns thus far. Stock prices have been resilient in the face of recent financial turbulence." The report added, however, that risk premia on corporate funding had risen and external conditions were becoming less supportive. Furthermore, the IMF report called for rate hikes to bring inflation - at 3.4% in 2007 - back within the 1%-3% target range, with the amount depending on exchange-rate developments. "Staff's forecast is for inflation of around 2% in 2008-09, assuming interest rates rise gradually to about 5% by end-2009 at an exchange rate of about 3.9 shekels per dollar," the report said. The report warned that growing uncertainty about external demand prospects from export partners, coupled with rising risk premia in capital markets, called for caution in raising rates. Speaking at the Managers Club of the Kibbutz Industries Association at Shefayim on Thursday, Bank of Israel Governor Stanley Fischer said the main goal of macroeconomic policy was to maintain growth and financial stability. "The most important target of macroeconomic policy is sustainable growth and generation of employment over time," he said. "Price stability must be preserved, particularly at a time of a slowdown in world trade and a looming global financial crisis. In this context, price stability is the ground for stability in the economy, and is vital to the economy's ability to continue growing over time." The Israeli economy was in excellent condition, Fischer said, and was growing at a rapid and stable growth rate. At the same time, he reiterated that the central bank would not intervene in the local foreign exchange market to halt the shekel's rally, which is hurting exporters. "Under current circumstances [of high inflation], there is no need and no justification for intervening in the foreign exchange market," Fischer said. "Foreign-exchange market intervention could cause considerable damage. Such a step is reserved for extreme situations. Lack of price stability and inflation will hurt everyone, but mainly the weak." Fischer emphasized that the shekel's strength was supported by the strength of the economy. "The Israeli economy naturally attracts large investments, mainly non-financial investments," he said. "The more the Israel economy continues to grow, the more the forces strengthening the shekel will continue."