The Bank of Israel has raised interest rates from 0.5 per cent to 0.75 per cent, becoming the first central bank in the developed world to push up interest rates since the credit crunch began.

Bank of Israel Governor Stanley Fischer said he does not expect others to follow his lead.

“Interest rates in the world’s leading economies will remain unchanged until the end of 2009 and maybe mid-2010. In contrast to Israel, those countries have low inflation.”

Inflation of 3.5 per cent over the past year and 1.1 per cent in July alone reflects the fact that Israel was the last Western economy into recession and looks like the first to recover.

The Israeli economy grew by 4 per cent in 2008 despite contracting 1.4 per cent in the final quarter as the recession hit. The downward trend continued in the first half of 2009, with the economy contracting by 3.1 per cent in Q1.

Nevertheless, the Central Bureau of Statistics reported last week that the economy had turned a corner, with 1 per cent growth in the second quarter of 2009 and an 11.3 per cent rise in exports between May and July. The Tel Aviv Stock Exchange has risen over 60 per cent since the start of 2009.

Although the improving global financial climate has helped, Israel’s Finance Minister Yuval Steinitz has credited the 2009/10 budget with dispelling “fear and uncertainty”.

Some fear that the rate hike will harm the competitiveness of Israeli exporters by strengthening the shekel. The BOI has purchased $12 billion this year to push the country’s foreign currency reserves up to $52 billion and keep the Israeli currency artificially low to help exporters.

Mr Fischer now feels inflation is a threat that cannot be ignored and some analysts expect he will raise interest rates to 1.75 per cent by the end of 2009.