by Laura Conaway

The Bank of Israel raised its benchmark interest rate by a quarter of a point today, becoming the first major central bank to hike the cost of borrowing in this present climate of a cheap money.

The Israeli economy was growing at an annualized rate of 1 percent last quarter. Inflation showed up, too — consumer prices jumped 1.1 percent from June to July. From Bloomberg:

"[Bank of Israel Governor Stanley Fischer] has to curb inflation and to curb inflation for next year he has to act now," said Shlomo Maoz, chief economist at Excellence Nessuah Investment House Ltd. in Tel Aviv, who predicted a quarter-point increase. "To act alone will be hard, but it will be a mistake for him not to act."

Fischer's walking the same political tightrope as other central bankers, including Federal Reserve Chairman Ben Bernanke. They've got to get their economies back to health, and they've got to watch out for inflation.

 

In announcing that the Fed's key rate would remain at the historic low range of zero to .25 percent this month, Bernanke also said the Fed would wind down its $300 billion program of purchasing U.S. Treasury bonds from banks. The Fed has been buying the Treasurys as a way to get more cash moving through the system and keep interest rates low. In technical terms, the Fed's strategy is known as quantitative easing — it's also called "printing money."

At some point, recovering economies will lead to consumer demand, and if there's too much cash sloshing through the system, prices will rise. So far, the U.S. has shown no signs of inflation, with consumer prices absolutely flat in July.

In an ideal world, Bernanke might keep pumping cash into the economy. "Optimal policy suggests more Treasury purchases would make sense. But that ignores the fiscal situation," former Federal Reserve governor Rick Mishkin told the Financial Times. "The Fed is absolutely right to get off that program — it cannot be seen to be accommodating the government deficit."