Bank of Israel Governor Stanley Fischer said yesterday that had Israel's real estate market continued along its recent path, it could have formed a bubble. That, he said, was why the supervisor of banks in the Bank of Israel, Rony Hizkiyahu, intervened recently in the mortgage sector.

"We will soon decide how to deal with the housing market long-term," Fischer said. He stressed the importance of dealing with the matter before it became a serious problem, but not necessarily through adjustments to interest rates.

Fischer was delivering the keynote address at the annual conference of the Israel Economic Association, at Kibbutz Ma'aleh Hahamisha. While the worst of the global economic crisis is over, he said, the crisis hasn't ended. In the near term, central banks must address not only price stability but also economic growth and job creation, he said.

He noted that in Israel for most of the period since 2004, inflationary expectations have been about 2%, around the middle of the target range. Stable expectations with regard to inflation, including the stability of real long-term interest rates, confer advantages even when short-term rates rise. Stable interest expectations, he said, also have an effect on wage demands.

If the annual inflation rate falls outside the target range of 1% to 3%, Fischer said the Bank of Israel would take action to get it within range within two years.

Addressing the central bank's purchases of dollars over the past two years, Fischer said that in a small, open economy such as Israel's the bank could not remain indifferent to exchange rate concerns when 40% to 45% of the country's GDP is exported. In response to those who argue that the purchase of foreign currency cannot be effective in the long term, Fischer said that during periods of sharp appreciation of the local currency the central bank can provide what the market needs by buying up foreign currency.