Frenkel urged the government to stick to a 4 per cent inflation target for 1999 to help ensure there would be economic gains from the depreciation that occurred last October.

He said controlling inflation would enable exporters to increase profits. "The interest rate policy that was implemented succeeded in stemming the wave of price rises in the last few months, strengthening the assessment that we can return to an inflationary environment of about 4 per cent, a level that existed until August, 1999," the Bank of Israel quoted Frenkel as saying in a public address.

The Bank of Israel raised interest rates by 4.0 percentage points in late October and November to 13.5 per cent after the shekel tumbled nearly 10 per cent against the dollar in October.

Inflation rose very sharply in thisperiod but is now expected to fall sharply from December to a level of about 4.5 per cent in 1999.

However, economists do not expect the Bank of Israel to lower interests rates in tandem with falling inflation. On Monday, the bank said it was holding the base rate at 13.5 per cent for January.

Frenkel urged lawmakers to rise above political wrangling and quickly pass the 1999 draft budget which has been hostage to a coalition crisis since October over prime minister Benjamin Netanyahu's land-for-security deal with the Palestinians.

Israeli lawmakers have set a May 17 date for early elections after Netanyahu failed to get broad support in parliament for his peace moves with the Palestinians.

The government, having failed to pass its spending package in parliament by the December 31 deadline, is operating this month inside the 1998 budget framework.

Government sources have predicted that parliament would approve the budget sometime in January. "We must guarantee conditions that will bolster faith inthe shekel and prevent its erosion. To do this, we must keep inflation low, pass a responsible budget framework (and) stick to policies that accelerate growth," Frenkel was quoted as saying.

He said Europe's move to a unified currency highlighted the need for Israel to join the process of economic globalisation.