'Tel Aviv Share Prices Are Reasonable'

Zvi Eckstein thinks the economy is in good shape, and so is the shekel

Zvi Eckstein likes the state of the economy, and doesn't foresee major appreciation of the shekel

Officially, Zvi Eckstein's title is deputy Governor of the Bank of Israel. In practice, he helps the governor, Stanley Fischer, shape Bank of Israel policy. He's the No. 2 man helping to shape interest rate policy (he's an expert on monetary economics) and economic policy, for instance supervision over bank fees, the war on poverty, and so on. Eckstein is also an expert on labor economics.

How does the state of the economy look to you?

"Very good: 5% growth that could reach - with the treasury's blessed reforms - 5.5%. The growth is due to exports, which are a billion dollars greater than imports. Exports will continue to drive the whole economy, and to bring in foreign currency. Israel has a surplus of $9 billion in its current account, so appreciatory pressure on the shekel will remain."

Will the appreciation be significant?

"We are keeping interest rates low, and if the dollar doesn't weaken in world markets, then we don't expect significant appreciation. It enables us to keep interest rates low."

Does the negative interest rate gap between the shekel and dollar worry you?

"One has to be careful with the negative rate gap. At the moment the gap is 1%, and meanwhile the economy is stable. That's good."

The Bank of Israel missed the inflation target for 2006. Will you meet the target range this year?

"According to our models, inflation will enter the target range by year-end 2007. We want to avoid jolts to the system by lowering interest rates excessively, followed by soaring inflation. It's good for markets that their system be predictable, therefore, we will try to adhere to the middle of the target range.

"That's where we are today, if we ignore the effect of the dollar and of energy prices: inflation is close to 2%."

(The target range for inflation, set by the government, is 1% to 3%.)

What's your forecast for Tel Aviv stocks? Will they keep rising?

"Our stock market is fine. The prices on the Tel Aviv Stock Exchange are reasonable and economic. If the economy continues to grow at a pace of 5%, there's no reason for share prices not to rise by 5%."