CAIRO: The central bank’s Monetary Policy Committee (MPC) announced it would meet Sunday to decide on the overnight lending and deposit facility interest rates, after inflation soared to 12.1 percent last month.
“The [central bank] is at a crossroads. They will either raise interest rates following inflationary pressures to give an indication they curb inflation, or they will keep current interest rates on hold until they see impacts of the last increase, said Reham El Desoki, senior economist at Beltone Financial.
The central bank raised last month its key overnight interest rates by 25 basis points, the first rate change in over a year. The bank said it raised its deposit rate to 9 percent and its lending rate to 11 percent due to higher food prices and inflationary pressure from surging economic growth.
This decision has been induced by the persistent increase in food inflation and expected upward pressure over the coming period, the bank said in a statement. The MPC has noticed that in addition to manufacturing and construction, other sectors have started to record higher growth rates that may precipitate more inflationary pressures.
The MPC’s final decision was not revealed by press time.
Economists explain that Egypt’s biggest concern these days lies in rising prices especially since the economy is growing at unprecedented rates. In the second quarter of 2007/08 real GDP grew to 8.1 percent. The Central Bank’s decision in February was announced the same week that Cabinet reported inflation rates jumped to 10.5 percent in January, up from 6.9 percent from the previous month.
“While the continued rise in inflation in February to 12.1 percent should entail an increase of the Central Bank’s key interest rates – as part of the inflation targeting monetary policy the CBE is preparing to implement – we believe another rise in [interest rates].would be better postponed to the next meeting on May 20 when the effect of the previous rise becomes clearer and the impact of the bank’s increased absorption of liquidity and government efforts to calm food prices starts to run its course, Beltone Financial, the Egypt-based regional investment bank, said in a statement.
“I think the committee should keep interest rates [unchanged] this time until it sees impact of the previous rise. They should wait and see how the market is reacting, El Desoki said.
While raising interest rates should encourage consumers to save and increase bank’s deposits, banks have not yet responded to the central bank’s February raise, as three-month deposit rates still hover in the range of 5.25-6.75 percent.
“The majority of banks did not respond.because they first want the Central Bank to raise interbank and treasury rates before they raise deposit rates [to balance their profits], explained El Desoki.
Elsewhere in the region, the United Arab Emirates, Saudi Arabia and Bahrain cut last Wednesday their interest rates by 75 basis points to 2.25 percent in response to a similar move by the US Federal Reserve a day earlier Te three countries’ currencies are pegged to the US dollar.
Kuwait – the only GCC country to de-peg its currency from the US dollar last May – left its benchmark interest rate unchanged at 5.75 percent.
The Federal Reserve slashed Tuesday a key US interest rate by three-quarters of a percentage point, its sixth cut since September, as part of an effort to hold off a deep recession and financial meltdown. Newswires reported that the Fed s action was taken on an 8-2 vote of its policy committee and thus the decision was reached to take the bellwether federal funds rate down to 2.25 percent, the lowest since February 2005.
“The rise in inflation has been exacerbated in the GCC countries with the weakening of the US dollar and the ensuing loosening of monetary policy. Caps on price rises, especially of rents and related housing costs, have been imposed by the government, in an attempt to curb price rises, commented Beltone Financial.
“We believe tighter fiscal policies, in light of the pegged exchange rate, would be necessary to help dampen inflationary pressures.
