Egypt will not increase interest rates

CAIRO: Even one of the highest inflation rates in emerging markets is unlikely to persuade Egyptian policy makers to raise borrowing costs on Thursday, as the central bank looks to a rebounding currency and weak consumer demand to do the work instead.

Five out of seven economists surveyed by Bloomberg predict the Monetary Policy Committee will hold the benchmark overnight deposit rate at 14.75 per cent, with two expecting an increase.

The bank last raised borrowing costs by 300 basis points in November, at the same time that it removed currency controls.

The pound has since lost almost half of its value while consumer prices soared, with annu- al inflation reaching 28 per cent in January.

Easing the inflation burden has become a key challenge facing the government of President AbdelFattah El-Sisi as it seeks to rebuild an economy without sparking a social backlash. Yet with the majority of Egyptians without bank accounts, raising interest rates typically takes time to contain inflation. It can, however, immediately increase government borrowing costs and curb credit growth, economists say.

Cost of imports

“A further rate increase will not be of much help,” said Radwa ElSwaify, head of research at Pharos Holding, a Cairo-based investment bank.

The pound’s recent rally will instead help provide some relief by reducing the cost of imports. The currency has gained more than 13 per cent this month as banks accumulated more dollars and foreign investors bought stocks and Treasury bills.

Consumers also don’t have the purchasing power to sustain the recent “abnormal” price increases, according to Hany Farahat, a Cairo-based economist at CI Capital.

Expected surge

Government and IMF officials say they had expected the surge in prices following the reform package, which also included raising fuel prices and introducing valueadded taxation.

Inflation will slow down “once these effects wear off, and so long as budget and monetary policies remain tight,” Chris Jarvis, IMF mission chief for Egypt, said in an e-mailed response to questions. Finance Minister Amr El-Garhy told Bloomberg TV on Sunday he expects inflation to peak by the end of the first quarter.

“Policy makers are likely to have been concerned by how quickly inflation has risen,” Jason Tuvey, London-based economist at Capital Economics, wrote in a report.

While they have resisted raising rates again since November, January’s inflation data “is likely to shift the balance,” he wrote, expecting a 100 basis-point increase.