Analyst views decision with guarded optimism
CAIRO: The Central Bank (CB) has raised overnight deposit and lending interest rates by 0.25 percent to 8.75 and 10.75, respectively, CB Deputy Governor Tarek Amer announced in a press statement following Thursday evening s Monetary Policy Committee (MPC) meeting.
The decision came just days before the formal announcement of the inflation rate s continued rise to 12.2 percent in November, up from 11.8 percent in October. In its statement, the CB said the interest rate hike came in direct response to rising inflation, which it continued to classify as a result of price-shocks due to the appearance of the Avian Flu Virus in Egypt last February and July s 30 percent fuel price hike.
The CB also attributes rising inflation as an expected result of continued economic growth, hitting 7.1 percent in 1Q 2007.
Amer s office declined to comment further about the decision, referring all inquiries to the released statement.
HC Securities Analyst Reem Mansour says the rise in the inflation rate was expected, but the quick decision to raise interest rates was not. Since inflation only increased by 0.4 percent, compared with 2.2 percent from September to October, Mansour says she expected MPC to hold off on the decision for another month.
There is a concern about negative real interest rates, Mansour says. When it will be more sound for me to hang on to my money and spend it instead of investing it. But we re still a long ways away from that.
Mansour adds she did not expect MPC to raise interest rates yet, considering the tendency of food prices to drop in winter. Since winter is a harvest season, large supplies usually force prices down, which should reflect on a flattening inflation rate in the near term.
The inflation rate rise has long been expected and hinted at by several senior government officials, including the Ministers of Finance and Trade, throughout last month. Shafik Gabr, Egyptian International Economic Forum president and Artoc Group chairman, told The Daily Star Egypt last week his main concern was the effect of raising interest rates on the growth rate blamed for raising inflation in the first place.
What s very important is the ability of the government to deal with [rising inflation] in a manner that does not cause higher interest rates. Because if it does, it s going to impact growth, Gabr told The Daily Star Egypt. That s the dilemma the government s going to have to deal with: how to maintain economic growth and control inflation.
The Ministry of Economic Development reported this week the economy grew at 7.1 percent in 1Q 2006-7, compared to 6.2 percent over the same period last year.
Total investments reached LE 29.2 billion in 1Q 2006-7, with the private sector accounting for 60 percent of that figure, up from LE 22 billion last year. Meanwhile, FDI is expected to reach almost $8 billion this year, up from $6.1 billion in 2005-6, and foreign currency reserves are at an all-time high of $25.1 billion.
Mansour says concerns of the possibility of rising interest rates slowing down GDP growth are warranted but lending rates are still about 2 percent less than from where those concerns should be heightened.
The decision, though, quells fears of dollarization since it continues to increase the spread between the Egyptian Pound and the US Dollar interest rates. She adds overnight rate hike indicates similar gradual ones will be made over the next few months.
For now, it seems like the right decision to make, says Mansour. But we won t know for sure until full November and December numbers are released. That s when we ll realize if we had made a mistake.
