CAIRO: The Central Bank of Egypt said on Thursday it would launch weekly repurchase agreements in the money market to keep short-term interest rates under control after the political and economic turmoil of the past six weeks.
From March 22, the central bank will offer seven-day repo agreements each Tuesday at an interest rate of 9.25 percent. Repos are a way for central banks to lend funds into the market in exchange for temporary custody of securities.
"Market liquidity conditions have come under pressure, while the balance of risks surrounding the inflation and GDP outlooks has changed," the central bank said.
"In order to ensure that the prevailing short-term market rates are consistent with the MPC’s (Monetary Policy Committee) policy rate…the CBE has decided to introduce repos."
The central did not elaborate on what securities it would accept in its repo operations, but a commercial banker familiar with the new system said Treasury bills would be used as collateral, and that the system would ease shortages of funds at some banks which threatened to boost market rates.
"Some banks have good liquidity and others are low," the banker said.
By permitting the use of Treasury bills in the operations, the system could also improve demand for the bills. Yields on them have been under upward pressure because of the political and economic instability.
The central bank has overnight corridor rates for deposits and lending, and it said after a meeting of the MPC on Thursday that it had decided to keep the rates steady at 8.25 percent for deposits and 9.75 percent for lending. It has left those overnight policy rates unchanged since September 2009.
Egypt’s political landscape has undergone a transformation since the MPC last met on Jan. 27, and this will continue to affect consumption and investment decisions, the central bank said.
The economy nearly ground to a halt during weeks of protests that toppled the government of Hosni Mubarak, and some of its main sources of foreign exchange, including tourism and foreign investment, have collapsed. Many factories continue to operate below capacity, and the stock exchange has yet to reopen after having been closed for six weeks.
All eight economists polled by Reuters this week had forecast that the MPC would leave policy rates unchanged. It is striking a difficult balance; an interest rate hike could slow growth in the struggling economy but a rate cut would risk boosting inflation, and rising food prices were a major factor behind the political unrest.
Urban inflation slowed in February to a year-on-year 10.7 percent from 10.8 percent in January, while core inflation, which strips out subsidized goods and volatile items including fruit and vegetables, eased to 9.51 percent from 9.74 percent.
Although urban inflation fell from a peak of 23.6 percent in August 2008, it reignited last year, climbing as high as 13.6 percent in January 2010.
Egypt’s Finance Minister Samir Radwan said on Thursday that economic growth might be as slow as 3 percent in the year to the end of June if production did not get back on track.
