Egypt central bank holds interest rates as expected

Sherine El Madany
4 Min Read

CAIRO: Egypt’s central bank kept key interest rates at a nine-month floor as expected on Thursday, signaling uncertain developments in Europe could crimp foreign investment as an economist warned inflationary pressures may rise.

The overnight lending rate was left at 9.75 percent and the deposit rate stayed at 8.25 percent, at their lowest levels since November 2006 as inflation subsides. The discount rate was also kept steady at 8.5 percent, the central bank — which stopped cutting rates in September — said on its website.

All 11 economists in a Reuters poll this week forecast unchanged rates after urban inflation fell to its lowest level since August.

"The current monetary stance is just about right. There is no justification for a cut, and it is too early to hike," Simon Williams, chief economist at HSBC Middle East, said on Thursday.

"Inflation is high but stable, and the economy is recovering well."

The bank’s Monetary Policy Committee had concluded the "inflationary pressures remain subdued and that the current level of … rate(s) is appropriate and supportive of the economic recovery," the central bank said, echoing a statement made after the previous MPC meeting on May 6.

However, uncertain economic developments in Europe and their potential impact on the global recovery could weigh on external demand and investment in Egypt, it added.

The annual urban inflation rate, the most closely watched price indicator, fell to 10.5 percent in May from 11.4 in April.

Inflation has been on a downtrend since peaking at 23.6 percent in August 2008 but has fluctuated. It has been falling this year since hitting 13.6 percent in January.

Some analysts say Egypt is likely to increase rates towards the end of 2010 as inflationary pressures weigh, ending the loose monetary policy in place since February 2009.

"I expect a hike before the end of this year," Williams said.

A hike could make it harder for Egypt to meet its gross domestic product growth target of about 5 percent in the fiscal year to end-June and 6 percent in 2010/11, compared with 4.7 percent in 2008/09.

A survey of 11 economists predicted GDP in the North African country would grow 5.2 percent in the fiscal year ending in June 2011, and 9 economists forecast it would grow 5.3 percent the year after.

That is faster than the predicted rates for all the Gulf Arab states except Qatar, but still below the annual rates of more than 7 percent that Egypt had posted before the global financial crisis.

Core annual inflation rose slightly to 6.69 percent in the year to May from 6.62 in April but remains within the central bank’s comfort zone of between 6 and 8 percent.

The MPC meets next on July 29.



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