Egypt hikes interest rates for 4th time this year

Central bank moves to bring down rising food, fuel and transport costs hitting public.
Egypt hikes interest rates for 4th time this year
By Alaa Shahine
Sat 28 Jun 2008 01:43 PM

Egypt's Central Bank has raised interest rates for the fourth time this year, it announced on Friday, but analysts said the widely expected move was unlikely to be enough to tame inflation, currently at a 19-year high.

The bank's Monetary Policy Committee (MPC) said in a statement on the 50 basis point hike that it "will not hesitate to adjust" key rates to ensure price stability in the medium term.

The decision takes the overnight deposit rate to 10.5 percent and the lending rate to 12.5 percent. The bank last raised the rates on May 9.

"Given the clear evidence of underlying inflationary pressures, the MPC judges that the balance of risks to the inflation outlook continues to be on the upside," the statement said. The bank also raised its discount rate by 100 basis points to 10 percent per year.

Rising food, fuel and transport costs drove urban inflation to 19.7 percent in the year to May, compared with 16.4 percent in the year to April.

The government raised fuel prices between 35 and 57 percent in the first week of May. It said the increases were needed to raise revenues to finance a 30 percent salary increase for public sector employees, itself a response to inflation.

Reham El-Desoki, a senior economist at Egyptian investment bank Beltone Financial, said raising interest rates alone was not enough at the moment.

"The decision... has to be coupled with a more aggressive use of other monetary policy tools because increasing interest rates alone may have an effect but over a longer period of time than necessary at this point," she told newswire Reuters.

Desoki said the central bank should use its deposit auctions to absorb more liquidity from the financial system.

At a time when the economy is growing at its fastest rate in decades, rising prices have emerged as a tough challenge for the Egyptian government.

Low wages and soaring food and fuel prices have triggered violent protests in some parts of the country, which has a low per capita income and high poverty rate relative to other Middle East nations.

The rating agency Moody's Investor Service lowered its outlook for Egypt's foreign currency bonds to negative from stable on Monday because of surging inflation.

The government said this week bringing inflation down was a high priority, but its main goal remained achieving high growth rates for the economy.

Desoki said the central bank may have different views.

"The central bank has made it clear that its objective is price stability," she said. "When having to choose between growth and curbing inflation, they will choose inflation."

Alia Mamdouh, an economist at CIBC Brokerage, said in a research note that the rate hikes would bring inflation down to an average of 18.3 percent by the end of 2008.

"Yet a maintained high level of inflation is still a concern with the rise in fuel prices being trickled down to the transportation costs that are feeding into food prices."

Investment bank EFG-Hermes said on Thursday it expected inflation to remain high for the rest of 2008 before stabilising around 10 percent in the second half of 2009, still well above the government's target of 6-8 percent. (Reuters)

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