Egypt’s Central Bank expected to maintain rate at monetary policy meeting

Published July 26th, 2016 - 10:00 GMT
Egypt, which has been facing foreign currency shortages, devalued the pound to 8.78 in March then hiked key rates by 150 basis points just days later to control inflation. (File photo)
Egypt, which has been facing foreign currency shortages, devalued the pound to 8.78 in March then hiked key rates by 150 basis points just days later to control inflation. (File photo)

Economists expect Egypt's central bank to keep rates unchanged at its monetary policy committee (MPC) meeting on Thursday, after it raised rates by 100 basis points at its last meeting.

The central bank put up its key rates by 100 basis points to their highest level in years at its last MPC meeting on June 16, a move economists said was meant to rein in surging inflation and ease downward pressure on the Egyptian pound.

Inflation, however, jumped for the third straight month in June as consumer demand spiked during Ramadan. But core inflation, which excludes volatile items like fruits and vegetables, rose only slightly to 12.37 percent from 12.23 percent in May.

Nine out of 13 economists in the Reuters poll expect the bank to hold rates on Thursday while four anticipate a hike of either 50 or 100 basis points.

"We expect policy rates to remain on hold with the central bank having raised rates by an aggressive 100 basis points in its last meeting," EFG Hermes economist, Mohamed Abu Basha, said, said.

"Inflation has indeed accelerated in June but mostly on base effects, and we expect it to ease in the coming couple of months," he said, adding that he looked to rate hikes later in the year with the implementation of fiscal reforms.

The central bank raised its overnight deposit rate to 11.75 percent at its last meeting on June 16, and its overnight lending rate to 12.75 percent.

Egypt, which has been facing foreign currency shortages, devalued the pound to 8.78 in March then hiked key rates by 150 basis points just days later to control inflation.

Compounding the inflationary pressures, Egypt is due to introduce a long awaited Value Added Tax later this year and further energy subsidy cuts, leading some economists to anticipate further rate hikes.

Four economists said they expect the central bank to hike rates further on Thursday, with three forecasting a rise of 50 basis points and one of 100 basis points.

"Although the CBE has been aggressive in its interest rate moves, we believe it will continue to maintain this approach given our expectations of an imminent devaluation and implementation of fiscal reforms (VAT and possibly energy price hikes)," said Reham El Desoki, an economist at Arqaam Securities who expects a 100 basis point hike.

"Interest rates have historically increased to higher levels to rein in dollarization and manage inflation expectations, and we believe that curbing the expected spike in short term inflation and de-dollarization are the main concerns for now for the CBE," she said.

Economic and political instability since the popular uprising in 2011 that toppled Hosni Mubarak contributed to comparatively slow growth of about 4.2 percent in the last fiscal year. The government expects growth of about 5 percent this fiscal year.

President Abdel Fattah al-Sisi is under increasing pressure to revive the economy and keep prices under control to avoid any backlash from the public, whose mantras in the revolution included "bread, freedom and social justice".

By Asma Alsharif

Editing by Mark Heinrich


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