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(photo credit: Ariel Jerozolimksi)
The Bank of Israel expects the country's inflation rate to reverse course and move back into its 1-3 percent target range by year-end, but Governor Stanley Fischer said that outlook as well as the positive view for the economy could be impaired by exogenous factors.
"Our prediction is for Israel's inflation to rebound to about 2% by the end of the year, but the uncertainty over disturbances from external factors such as the dollar and energy costs make it hard to forecast," Fischer said during a press conference in Jerusalem on Wednesday. "The problem in Israel, in comparison to other countries is that changes in the exchange rate or volatility of energy prices have a much stronger and more immediate affect on the inflation rate, as we have a tendency to set prices in dollar terms."
For 2006, Fischer said that based on estimates of the consumer price index for December and the cumulative CPI since January 2006, was expected to be close to zero. December figures will be released Monday.
Looking ahead to this year, Fischer said the central bank would be very active in continuing its interest-rate policy in the attempt to return inflation gradually to the target range by the fourth quarter.
"If the dollar continues to strengthen, then we might consider reversing our interest rate policy and commence raising rates again," said Fischer, who in December cut rates for the third time in three months, dropping the base rate to 4.5%.
Meanwhile, Fischer noted that external factors such as the corruption scandals embroiling the country could impair the positive outlook on the economy and damage confidence of both local and foreign investors.
Commenting on the ongoing investigation of the Israel Tax Authority, Fischer said it was regrettable and serious, but that the most important thing was to conclude the police investigation in order to get back to normal and restore civic and investor confidence and to avert any damage that could be caused to the country's economy.
"As more and more instances of corruption come to the forefront, it may begin to damage the economy in that it may influence investor confidence of both Israelis and, in particular, foreigners," Fischer warned. "The appointment of Yossi Bachar as interim head of the Tax Authority is the first step in the right direction to help stabilize the situation, while also signaling that we are dealing with it."
Fischer said the Olmert issue may have been nothing more than professional disagreements.
"I think there is a possibility that there were professional disagreements or differences of opinions in the Treasury over how to best sell the company, at least this is what I understood as I was a little bit involved in this," he said.
The governor urged investors not to listen to all the "propaganda, but rather to look at the fact of the very strong economy.
"The Israeli economy demonstrated impressive achievements in 2006 - rapid growth, financial stability and low inflation - despite external events such as the hostilities in the North, as well as an impressive current account surplus in the balance of payments and incoming foreign investment," he said.