"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% in 2009 and is forecast to grow 3.5% 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% from 0.5%, with the last move a quarter-point increase on December 28.
"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% to 3%.
Inflation is expected to ease to 2.3% 2.7 % in 2010.
Fischer also said that Israel has the potential to grow above the 5% 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%," he said, noting that peace would likely lead to much higher foreign investment.
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