Bottom Shekel / Fischer the First

At the height of the global crisis triggered by the Lehman Brothers' collapse in September 2008, it was Stanley Fischer, the governor of the Bank of Israel, who was first to slash interest rates. He was closely followed by other central bankers, including his former pupil, U.S. Federal Reserve Chairman Ben Bernanke. Soon, interest rates had hit rock-bottom practically around the world.

Yesterday Fischer was again a step ahead of his peers, becoming the first to raise interest rates. Not by much - by 0.25%, to 0.75%. This time, though, it's not certain that his colleagues at the world's other central banks will follow in his wake.

Why does Fischer allow himself to go where the others are afraid to tread? The answer lies in the special condition of Israel's economy. Throughout nearly the entire crisis, it was in better shape than the economies of the west. The banks stood strong, the real estate market didn't slump. The problems we did experience were, by and large, imported.

Despite the doubts, the cheap money that the central banks poured into the business sector and the massive injections by governments proved to be the medicine needed to release a system that had seized up. Credit is becoming available again, liquidity is improving. The financial markets have rebounded and investors have regained their faith.

The stock market has rebounded, property prices are on the rise, and also, inflation is raising its head.

The rate hike for September is designed to cool down inflation, and perhaps to prick any bubbles forming in the stock market and real estate sector. A lot of money had poured into these because bank deposits offered basically nothing. Israel presented positive economic growth for the second quarter, giving Fischer the confidence to raise local interest rates, albeit not by much. Interest of 0.75% is still very low in absolute terms. It won't jolt the market, though it could cause a pullback in the short run.

Fischer had been worried that a rate hike would weaken the dollar against the shekel. So he took the preliminary move of warning that the central bank would intervene in the forex market if and when it saw fit, launching little guerrilla missions to soak up dollars when needed.

Now further rate hikes remain contingent on how this one affects inflation and the shekel-dollar rate, not to mention what other central banks around the world choose to do.