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Central Bank's raised interest rates not enough to curb inflation, says analyst - Daily News Egypt

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Central Bank's raised interest rates not enough to curb inflation, says analyst

CAIRO: As the Central Bank of Egypt (CBE) announced Friday it raised key overnight interest rates for the fourth time this year by 50 basis points to curb soaring inflation, experts argue more measures need to be taken. The bank s Monetary Policy Committee (MPC) said on Friday it raised the overnight deposit rate at …


CAIRO: As the Central Bank of Egypt (CBE) announced Friday it raised key overnight interest rates for the fourth time this year by 50 basis points to curb soaring inflation, experts argue more measures need to be taken.

The bank s Monetary Policy Committee (MPC) said on Friday it raised the overnight deposit rate at 10.5 percent and the lending rates at 12.5 percent, citing inflationary pressures. Friday’s move is the fourth time the CBE hikes its corridor interest rates by a total of two points.

“Given the clear evidence of underlying inflationary pressures, the MPC judges that the balance of risks to the inflation outlook continues to be on the upside, and today’s decision is aimed at containing inflation expectations, the bank said in a press statement.

Inflation soared to 21.1 percent in the year to May, its highest level in almost 19 years. According to CAPMAS statistics agency, year-on-year inflation in urban areas was 19.7 percent for May and 22.9 percent in rural areas.

The inflation rate can be compared with 16.4 percent in the year to April, itself a three-year high.

Soaring food and fuel costs have been the main drivers towards inflationary pressures. The government introduced early May steep increases to fuel prices by 35 and 57 percent, in response to a 30-percent salary increase for public sector employees aimed at tackling inflation.

The MPC explained that domestic food inflation has sharply risen to 27 percent, further intensified by May’s price adjustments as well as high economic growth. “The impact of the second round effects on inflation will unfold over the coming months, it said, referring to May’s fuel price hikes.

“Despite the recent slight moderation in international food inflation, there are concerns relating to grain crops in light of adverse weather conditions which might prolong the international food price shock, the MPC added.

Reham El Desoki, a senior economist at Egyptian investment bank Beltone Financial, said that the new CBE interest rate hikes were in line with their expectations. “Containing inflation expectations is of utmost importance at a time when inflation appears to be spiraling to unprecedented levels, especially since the drivers of inflation show no signs of abating, she commented.

These drivers, she pointed out, include international food inflation, high economic growth, second round effects of the energy price and tax adjustments, in addition to seasonal rises in inflation, prompted by the summer, Ramadan, and its subsequent religious holidays.

El Desoki expects inflation to remain high in the short term, averaging 11.9 percent in fiscal year 2007/08 and around 14 percent in the following fiscal year. She pointed out that raising interest rates alone were not enough to contain inflation at the moment.

Increasing interest rates alone, she said, would only have an effect in the long run. “A tighter monetary policy whereby the CBE uses its full range of monetary policy tools to curb money supply would be essential to help compensate for deficiencies in the monetary policy transmission mechanisms and high liquidity in the banking system, which limits the effect of policy rate hikes and increments in banks interest rates, El Desoki added.

The decision to raise interest rates, she said, has to be coupled with other monetary policy tools such as using the CBE’s deposit auctions to absorb more liquidity from the financial system.

Egypt’s surging inflation rates has recently weighed on the country’s foreign currency bonds, after the rating agency Moody’s Investor Service lowered last Monday its outlook for these bonds from stable to negative because of surging inflation.

The government responded by saying this week that bringing inflation down was a high priority, but added that its main goal remained to achieve high growth rates for the economy.

Egypt’s economy is growing at its fastest rate in decades, currently at 7.1 percent, and the government expects it will sustain the same levels this year.

On the other hand, the CBE said it would not hesitate to further adjust its key interest rates to ensure price stability in the medium-term.

Despite the negative impact of hiking interest rates on economic growth, El Desoki said that spiraling inflation to levels that currently exceed 20 percent “poses a threat to growth at this point.

The MPC is due to meet again on Aug. 7.

Topics: FJP

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