CAIRO: The Central Bank of Egypt raised Friday its key overnight interest rates for the third time this year to combat rising inflation, particularly after the government’s decision last week to hike prices of gasoline and cigarettes, among other things.
The bank’s monetary policy committee (MPC) lifted its overnight deposit rate by 50 basis points to 10 percent and the lending rate to 12 percent.
“The headline CPI [consumer price index] inflation has maintained its upward trend reaching 16.4 percent in April as domestic food inflation perpetuated to 22 percent driven mainly by the elevated international food prices, the bank said in a press statement.
“Moreover, further spillover to non-food prices contributed to the latest inflation outturn, it added. The MPC raised its rates twice this year by 25 and 50 basis points, respectively, citing consecutive upsurges in the CPI – from 6.9 percent in December 2007 to 14.4 percent in March 2008.
Investment bank Beltone Financial pointed out that the MPC was inclined to raise its corridor interest rates as part of its efforts to implement an inflation targeting monetary policy and in response to the expected impact of the recently announced measures, especially the hike in prices of energy products, which would lead to a spike in inflation in the short term.
The government introduced last week abrupt increases in high-octane fuel, natural gas prices for energy-intensive industries, and cigarettes, as well as fees of vehicle licensing. The decision – prompted by President Hosni Mubarak’s public-sector 30 percent pay raise – pushed gasoline prices up by 35-45 percent, raising inflation concerns.
“Despite tentative signs of moderation in international wheat prices, the domestic inflation outlook is affected by the latest regulated price adjustments, the bank said. “While the immediate one-off effect would be reflected in the next inflation reading, the consequent second round effects of these price adjustments pose an upside risk to the inflation prospects.
“These unfolding developments will likely keep annual inflation rates high until the combined effects of price increases related to the international food price shock and the current regulated price adjustments taper off, the bank added.
Urban inflation in Egypt soared 16.4 percent in the year to April, from 14.4 percent in the year to March.
While the CBE raised its key overnight interest rates in February and March, almost half of Egypt’s banks did not respond to the bank’s measures.
According to local news, the CBE threatened May 4 to punish retail lenders that fail to raise interest rates on deposits to reflect the increase in its base rates. The CBE has deterring measures that makes banks bite their nails in regret if they refuse to comply with the corridor rates, Central Bank Governor Farouk El Okdah was quoted in Al-Gomhuria newspaper as saying on May 4. It is a shame that banks deposit at the Central Bank with a rate of 8.5 and 9 percent, while offering clients 6 and 6.5 percent.