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Bank of Israel Governor Stanley Fischer, voicing confidence that Israel's economy will successfully contend with economic challenges over the next two years, conceded Tuesday that the simultaneous battle with both inflation and recession may have negative effects soon.

Speaking to a meeting of French and Israeli industrialists, Fischer said there was "a very significant slowdown in growth in Israel, the result of things happening abroad. There is a threat of recession, and a threat of inflation, and we must decide the 'dosage' at which to treat inflation, knowing that it is possible that within a short time, our situation in real terms may be more difficult."

Fischer told the industrialists, some of them accompanying French President Nicolas Sarkozy on his current visit to Israel, that he was aware of the need to weigh inflation and its short-term consequences on the one hand, with hardships faced by exporters on the other.

"In the end, central banks the world over must deal with inflation, and we began doing so less than a month ago, raising interest rates by 0.25 percent."

Israel's economy is one which is succeeding in growing, as well as one which faces challenges stemming primarily from abroad," he said. "But we intend to maintain discipline in the economy, both fiscal and in terms of inflation ? and I think that we will be able to successfully contend with the challenges of the coming two years."

According to Fischer, the strength of the shekel is an outgrowth of foreign investment in Israeli companies, as well as a new phenomenon, that of Israelis halting their practice of investing their capital abroad.

"We are in a global financial crisis, and Israelis, rather than sending their money abroad, are bringing it back home." The big change in 2007-2008 has been the stoppage in outward flow of capital since the start of the year. That is a vote of confidence, on one hand, but it has repercussions for the economy as a whole."

"We all hear about our having a weak government, but it has succeeded in maintaining a very strong fiscal discipline," Fischer said.

Last year, the government balanced its budget, and this year, the ceiling of its deficit will be 1.6 percent of Gross Domestic Product, a figure economists view as good. It is estimated that by year's end, the figure will be 1 percent, consistent with the prediction for 2009.