Forecast: Egypt central bank to keep interest rates unchanged

Reuters, Wednesday 8 Jun 2011

Seven economists in a Reuters survey predict the central bank's Monetary Policy Committee will leave its overnight lending and deposit rates unchanged

All seven economists in a Reuters survey this week forecast the central bank's Monetary Policy Committee will leave its overnight lending and deposit rates unchanged.

The bank has maintained its lending rate at 9.75 per cent and its deposit rate at 8.25 per cent since 17 September 2009.

The Egypt economy fell into recession after the uprising that caused President Hosni Mubarak to step down in February, when some of its main sources of foreign exchange, including tourism and foreign investment, collapsed.

A US$3 billion funding package that Egypt sealed with the IMF on Sunday has given the market confidence the international community will provide fiscal support to the government, said John Sfakianakis, chief economist at Banque Saudi Fransi.

"The funding will provide fiscal sustainability in the short term," he said. This "provides a cushion for certainly not decreasing rates."

Economists say the government is now more concerned with pulling Egypt out of recession than combating inflation.

The Finance Ministry said in a statement posted on its website on Sunday that the economy contracted in first the six months of 2011 and that it was likely to grow only 3.2 per cent in the 2011/12 financial year, which begins next month.

It said high global food prices, distribution bottlenecks in Egypt and a planned increase in the minimum wage would keep inflation at a "low double digit level" in 2011/12.

Annual urban consumer inflation accelerated in April to a 12-month high of 12.1 per cent as food prices soared.

Core annual inflation, which strips out subsidized goods and volatile items including fruit and vegetables, rose to 8.76 per cent in the year to April from 8.54 per cent in March.

May inflation figures are expected on Thursday.

"Restoring growth is the real challenge. Inflationary pressures are likely to dissipate without any adjustment in rates," said Simon Williams of HSBC.

An interest rate hike could risk further pain to an economy that is already in recession because of political unrest.

A decrease in rates may risk spurring an increase in inflation. Rising food prices were a major factor in stoking the protests.

Still, the impact of interest rate policy in Egypt is limited because the banking sector -- and the amount of credit it extends as a percentage of GDP -- is relatively small, analysts say.

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