The Governor of the Bank of Israel Prof. Stanley Fischer on Monday said he would reduce interest rates gradually because any "drastic" reduction would cause inflation to overshoot the central bank's target.
"Israel's economy is vulnerable to external shocks that may cause inflation to fluctuate sharply and quickly," Fischer said at the Globes Israel Business Conference, where he also reiterated the central bank's recently raised forecast for GDP growth in 2006 amid signs the economy was recovering more rapidly after the war in Lebanon.
"The economy after the war in the North is recovering even faster than we thought at first," said Fischer. "The impact of the hostilities on GDP was weaker than we had assessed previously, and it appears that the rate of growth in 2006 will be 4.8 percent, slightly higher than our initial post-war forecast."
Fischer added that national accounts data indicated a 1.4% decline (in annual terms) in GDP in the third quarter.
Looking ahead to 2007, Fischer urged the government to give high priority to obtaining member ship in the Organization for Economic Cooperation and Development (OECD), which would promote Israel's position in important world economic forums, strengthen its economic ties, promote economic reforms and help improve the country's credit rating.
"I hope that OECD members will reach a consensus that Israel should belong to the group before a meeting of ministers in May 2007," Fischer said.