Egypt pulls surprise by hiking interest rates again
cairo — Egypt’s central bank, faced with accelerating inflation, late on Thursday raised its key interest rates by 200 basis points for the second policy meeting in a row, confounding economists who had forecast it would hold them.
At a meeting of its Monetary Policy Committee, the bank raised the overnight deposit rate to 18.75 per cent from 16.75 per cent and its overnight lending rate to 19.75 from 17.75 per cent, it said in a statement, after hiking them by 200 points each at the last policysetting meeting in May.
Egypt floated its currency in November, and since then its pound has roughly halved in value. As the currency’s value dropped, inflation surged. Although the core rate slipped in May, it remains almost 30 per cent year-on-year.
The central bank raised interest by 300 basis points after the currency floatation, which helped Egypt clinch a three-year $12 billion International Monetary Fund lending programme tied to ambitious reforms such as tax hikes and subsidy cuts.
The IMF has said lowering inflation is key to keeping its economic reform programme on track and that raising key interest rates could be an appropriate tool for doing so. Ongoing reforms tied to the IMF loan programme had increased risks for inflation, which the bank aims to reduce to 13 per cent by end-2018, the bank said. “Higher prices of hydrocarbon products effective June 29, 2017, higher value added taxes effective July 1, 2017, higher electricity prices scheduled for July 2017, as well as other potential regulated price adjustments further increase inflationary pressure,” it said. Nine out of 10 economists polled by on Monday predicted the bank would leave its key interest rates unchanged. Hany Farahat, senior economist at CI
9/10 economists were proven wrong with Egypt central bank’s surprise move
Capital, was the sole dissenter. He told Reuters on Thursday following the hike announcement that he did not expect it to be effective in combating inflation.
“We expected a rate hike despite our view that it will not reduce inflation. The central bank had no choice as it followed a very steep fuel price hike, which the finance ministry said would add four per cent to inflation,” he said. “Impact from the hike will be diluted as bank are now reluctant to pass on the rate increases on to their deposit and savings rates as a way of limiting costs. Accordingly, this step will not absorb additional liquidity from the system.”
Egypt’s economic growth has deteriorated since a 2011 uprising drove tourists and foreign investors away, draining foreign reserves and putting pressure on the government amid tough economic reforms that have sent inflation shooting up. —