* Central banks will not keep interest rates very low
* Rate hikes not necessary till signs of growth seen
* Worst of the crisis over
* Credit rating safe if Israel sticks to budget plan
(Recasts, adds comments)
By Steven Scheer and Tova Cohen
TEL AVIV, June 11 (Reuters) - Global central banks will not keep interest rates very low as they did earlier in the decade, a policy that helped to create the bubble in the financial system, Bank of Israel Governor Stanley Fischer on Thursday.
"Given the belief that the very low interest rates between 2003 and 2006 were in part responsible for this crisis, I expect -- and in at least in one case I know -- the central banks will not hesitate to raise interest rates if they think the risk of inflation is increasing to where it is becoming inflation," Fischer told Reuters in an interview.
However, Fischer, a reknowned economist and a former professor of Federal Reserve Chairman Ben Bernanke, indicated rate increases would not happen anytime soon.
"It is unlikely to become necessary to raise interest rates until there are more signs of growth," he said on the sidelines of the IOSCO conference of securities regulators.
Like the Fed and other central banks, the Bank of Israel cut its key borrowing rate sharply -- by 3.75 percentage points from last October through March to a record low of 0.5 percent.
"We will not be at 0.5 percent forever. That is absolutely clear. That is a totally exceptional rate," Fischer said.
"As the economy returns to normalcy -- and it should -- we will raise rates at some point down the road. Just how long a road that is, we don't know at this point," he said.
Fischer said it would be a "mistake" to make a pre-emptive rate hike even if inflation shows signs of increasing.
After a 3.6 percent annualised contraction in Israel's economy in the first three months of 2009, Israel should still show another quarter or two of slowdown in economic activity "and after that even unemployment will continue to rise."
NO ISRAEL RATINGS CUT
At this point, the central bank was sticking to a forecast of a 1.5 percent contraction in 2009, although Fischer noted that could be altered if there were signs of further improvement in the U.S. and other countries Israel trades with.
"The worst of the crisis in the sense where we were seeing phenomena we haven't seen before, that's over," Fischer said.
Fischer also said he did not expect a cut in Israel's sovereign credit rating as the budget deficit target was set to rise to 6 percent of gross domestic product this year. He noted the increase from 2.1 percent in 2008 stemmed largely from sharply lower tax income resulting from the recession.
"There are very important countries with deficits double that level as a share of GDP," Fischer said, noting that state spending is set to decline in 2011.
"If we show signs of sticking to that (fiscal discipline) ... we should be able to maintain our rating," he said.
Speaking about the Bank of Israel's daily purchases of foreign currency and government bonds, Fischer said the central bank remained committed to buying $100 million a day of foreign currency and that it would complete its plan of buying 15-20 billion shekels ($3.8-$5.1 billion) of government bonds.
The central bank has already exceeded a plan to raise its forex reserves to a maximum of $44 million. They were above $47 million in May.
"As long as we believe the economy remains in danger of continuing the recession, we don't have a plan to change that approach" of buying foreign currency, he said.
Fischer, who said the central bank was not targeting any
specific dollar-shekel rate
"It depends on the state of the economy, it depends on capital flows and it depends on what the geopolitical situation will be," he said.
($1 = 3.93 shekels)
(Editing by Toby Chopra