Despite the improvement in certain economic parameters during the second quarter, the Israeli economy is still fragile, says HSBC.

The industrial product and index of combined indicators showed signs of an upswing in the second quarter. But at best, Israel's gross domestic product will stay unchanged in the third quarter, or at worst shrink, the investment bank estimates.

HSBC sees Israel's product contracting by 1.8% in 2002. Other investment banks predict contraction of 1.5%. But HSBC believes what rally there is, is weak, and that the economy remains vulnerable to deterioration of the security situation.

HSBC does not believe the Bank of Israel will raise interest rates tomorrow, when announcing its monetary policy for September.

Last week HSBC predicted that interest rate on central bank sources will drop to 8.5% by year-end, from the current level of 9.1%, and fall to 5.5% by the end of 2003.