Egypt central bank holds interest rates stable despite protests

Reuters, Thursday 27 Jan 2011

Egypt's central bank kept its key overnight interest rates steady on Thursday, in line with analyst forecasts in an poll taken before unprecedented protests broke out nationwide this week

In its elevnth pause since it stopped lowering rates in September 2009, the central bank kept the overnight lending rate at 9.75 percent and the deposit rate at 8.25 percent, it said on its website. It also left the discount rate unchanged at 8.5 percent.

The bank is expected to issue a statement about its decision later.

All thirteen economists in a Reuters poll this week forecast that the bank's Monetary Policy Committee would keep rates steady, though many expressed concern over accelerating inflation.

Inflation continued to creep higher in December, with urban consumer price inflation quickening to a year-on-year 10.3 percent in December from 10.2 percent in November.

Although urban inflation fell from a peak of 23.6 percent in August 2008, it reignited late last year, climbing as high as 13.6 percent in January 2010.

More worrisome, year-on-year core inflation, which strips out subsidised goods and volatile items including fruit and vegetables, rose to 9.65 percent from a revised 8.93 percent in November.

It was the third month that core inflation was above 8 percent. The central bank has not publicly said what its comfort zone is, but many analysts believe it is between 6 and 8 percent.

Even before the protests reached Egypt, analysts in the poll had said political concerns after the ouster of Tunisia's president earlier this month made it less likely that the central bank would respond to the higher inflation by increasing interest rates.

The central bank slashed rates last year in a cycle of cuts aimed at spurring growth in the wake of the global economic crisis. It has held them steady since, and analysts do not expect it to begin raising them until later this year.

The government has forecast that the economy will grow by 7 percent in the fiscal year that begins in July 2011, up from 5.1 percent in the year ended June 30, 2010 and an expected 6 percent this year.

The government believes it needs a minimum 6 percent growth to absorb new entrants to the labour force.

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