HERZILIYA, Israel Jan 31 Bank of Israel Governor Stanley Fischer said on Sunday that rising housing prices did not constitute a bubble.
Housing prices rose 5.6 percent in 2009, contributing to an inflation rate of 3.9 percent last year.
"We have a problem of real estate market and people call it a bubble. But this is not a bubble," Fischer said at the annual Herziliya conference.
Fueled by strong growth in the second half of the year, Israel's economy grew 0.5 percent in 2009 and is forecast to grow 3.5 percent in 2010.
"Israel's economy is now in recovery but this recovery is very fragile," Fischer said. "That is why Israel has to be very careful getting out of policies executed during the crisis."
The Bank of Israel last August was the first major central bank to raise short-term interest rates. It has so far raised its key lending rate to 1.25 percent from 0.5 percent, with the last move a quarter-point increase on Dec. 28.
The central bank last week opted to leave its key rate unchanged.
"We should not unwind the monetary stimulus so quickly," Fischer said.
He noted that the central bank was trying to balance two factors -- supporting the economy while trying to keep inflation to within an official annual target of 1 pct to 3 percent.
Inflation is expected to ease to 2.3 to 2.7 percent in 2010.
Fischer also said that Israel has the potential to grow above the 5 percent level the country grew between 2003 and 2008 but peace with the Palestinians and other regional neighbors were needed.
"If there is peace, we would get closer to growth of 6 and 7 percent," he said, noting that peace would likely lead to much higher foreign investment.
(Reporting by Steven Scheer, editing by Martin Golan)