CAIRO: The Central Bank of Egypt (CBE) raised overnight interest rates by a cumulative 2.75 percent this year to battle 16-year high inflation, but economists argue that monetary policy tightening alone is not enough to help the economy.
“These rate hikes have not contained inflation, said Passant Fahmy, banking expert and senior consultant at Egyptian-Saudi Finance Bank. “You cannot only [rely on] raising rates and tightening liquidity to bring inflation down. There are other factors to play as well.
The current surge in inflation rates, she said, is not only due to a rise in global prices of essential commodities. “Demand is outstripping supply, and there is not enough supply of products on the market. .exports are not attractive because the dollar is strong against the Egyptian pound, she added.
“No matter how much the central bank raises rates, [such factors] will continue to pressure inflation rates, she added. At the same time, “the central bank has to raise rates. It cannot afford to stand still in the face of such inflationary pressures.
The CBE raised September 18 interest rates for the sixth time this year to tame inflation, which is running at a 16-year high of 23.6 percent in the year to August. The moves take its overnight deposit rate to 11.5 percent and its overnight lending rate to 13.5 percent. It also increased the discount rate to 11.5 percent.
Having weighed both the international and domestic information available, the (central bank) judges that an additional rate hike is needed today to contain inflation expectations, the central bank said in a statement.
Egypt has said that bringing inflation down is a high priority for the most populous Arab country, where low wages and soaring food and fuel prices triggered violent protests in some areas earlier this year.
As they aim to curb inflation, the rate hikes have had a negative impact on the banking sector and investment in general, Fahmy said.
“Banks have become lazy. They don’t want to spend, she explained.
“Banks just put their money in the central bank instead of investing because corridor rates are up. It’s less risky that way for them.
Radwa El Sweify, banking analyst at Beltone Financial, agreed with that view saying that higher interest rates together with inflation would slowdown growth.
Many economists doubt that monetary policy tightening alone is enough to bring down inflation because of abundant liquidity in the banking system.
It s hard to see how further rate hikes will do much to rein in current inflation, Caroline Grady, an emerging markets economist at Deutsche Bank, recently told Reuters. The interest rate transmission in Egypt is low and coupled with the fact that it takes time for rate hikes to have any effect I don t see much impact from [the central bank] hiking further.
“Raising interest rates alone does not positively reflect on inflation rates.
[The central bank] needs to push banks towards spending and investing rather than saving, Fahmy suggested.
She explained that when banks invest in different projects across the country, several companies will grow bigger, unemployment rates will decline, and there will be enough supply of products on the market, which will eventually contain inflation.
“On the other hand, when investment subsides, several companies will close down, private consumption will diminish, and unemployment rates will increase.
Raising interest rates alone would help if the economy was stable, she stated. “However, besides inflation, we have a weakening GDP [gross domestic product], higher poverty rates, and very low infrastructure. The solution is not only to raise interest rates every month.
It’s a combination of efforts, she pointed out. “Along with raising interest rates, the central bank should encourage banks to lend, especially to SMEs which will help the economy grow forward.
Economists seem to be at odds whether the central bank would be prompted to hike interest rates again this year. Grady expects the bank to halt its series of rate rises at its next meeting on November 6 and wait for past tightening in monetary policy to feed through to the economy.
Meanwhile, Reham ElDesoki, an economist at Beltone Financial, predicts the central bank will further raise interest rates at least one more time this year by 50 basis points before pausing to give the impact of its multiple consecutive hikes a chance to run its course.
Headline urban inflation could average 24 percent by the end of the year with an annual average of 20 percent in 2008, she said.
El Desoki added real GDP growth rate could retreat to 6.6 percent in fiscal year 2008/09 and to 5.8 percent in FY2009/10, weighed down by impacts of higher inflation and monetary tightening on economic growth.
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