Central Bank of Egypt's headquarters is seen in downtown Cairo, Egypt March 8, 2016 (Reuters)
The Central Bank of Egypt (CBE) has decided to raise interest rates by 100 basis points after core inflation rate hit a seven-year high in May.
The bank raised the overnight deposit rate, the overnight lending rate and the rate of the CBE's main operation to 11.75 percent, 12.75 percent and 12.25 percent respectively, read the CBE's statement.
The annual core consumer price index that the central bank uses to measure the level of prices after excluding the volatile cost commodities such fruits and vegetables hit a seven year-high jumping to 12.2 percent in May from 9.5 percent in the previous month.
"After evaluating the balance of risks surrounding the inflation outlook to date, the MPC judges that a rate hike is warranted to anchor inflation expectations over the medium-term," read the statement, adding that it is monitoring the effect of fiscal policy on the inflation outlook.
Out of five economists interviewed by Ahram Online earlier this week, only two had predicted that the CBE would raise interest rates.
However, raising interest rates represent a challenge to the government as it seeks to cut its budget deficit that is expected to reach 11 to 11.5 percent of GDP in the current fiscal year, way above the initial target of 8.9 percent.
Economists surveyed by Ahram Online earlier this week expected interest rates to see further hikes in the coming fiscal year, set to start in July, to coincide with the government plans to slash energy subsidies.
Electricity prices will rise in July again as part of the government's five-year reform plan to cut electricity subsidies by 67 percent. All consumption brackets will increase with the lowest three brackets that were exempted last year, witnessing a 42 percent increase on average, Ahram Online calculated, data that was reported by the Arabic daily newspaper last month.
The government plans to cut its total subsidy bill in the new budget by 14 percent, but is yet to specify when and by how much fuel prices would rise.