Israel's leading investment houses forecast Tuesday that the current environment of low interest rates coupled with low inflation rate will remain for at least the next two years. "Globalization, cheap labor and low inflation, among other parameters, have led to a situation of low interest rates," said Roy Vermus, CEO of Psagot Ofek Investment House Ltd., at the TheMarker Investment Consultant convention in Tel Aviv. "This environment is not a temporary one, but is expected to be ongoing for some time and we will see low interest rates in Israel at least over the next year or two." As a result, Vermus said, investors are advised to increase the percentage of the stock investment in their portfolios. "What we will see is less and less investment in deposits or makams (treasury bills) and a higher percentage of investment in equities in the local market and abroad," said Vermus. "The name of the game is asset allocation in the local market and abroad, but the Israeli investor portfolios are still too much focused on investment in the local market compared with, for example, asset allocations of US investor portfolios." On Monday, the Bank of Israel left its benchmark lending rate unchanged at 4 percent after five cuts in as many months, on the back of expected robust economic growth of 5.1% and a weaker shekel, which is hoped to slowly bring the negative inflation rate back into the 1% to 3% target range by the fourth quarter of 2007. However, looking ahead, investment houses do not view the central bank's move to a central stance as the end of the easing cycle. "There is a good chance that the Bank of Israel's weaker shekel assumption may not hold, pressuring the Bank to consider another quarter points rate cut," said Turker Hamzaoglu, strategist at Merrill Lynch, in a note to clients, adding that he continued to believe the shekel was cheap for two main reasons. "First, capital inflows are still strong, mostly in foreign direct investment and portfolio inflows to equities. Second, we expect the current account to post a surplus of 5% of GDP in 2007, supporting the shekel." Similarly, Moshe Gabbai at Prisma Capital Markets believes the shekel strength will continue, forcing the Bank of Israel Governor Stanley Fischer to cut interest rates another one or two times. Following Monday's decision by the central bank to leave interest rates unchanged, the shekel on Tuesday strengthened further closing at NIS 4.18 from NIS 4.20 on the previous day.