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Mon 24 Mar 2008 03:58 PM

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Egypt hikes interest rates to tackle inflation

Central bank raises key rates for second time this year, citing rising food prices.

The Egyptian central bank raised its key overnight interest rates on Monday for the second time this year, citing rising food prices that had driven inflation to an 11-month high.

The bank said in a statement it decided to lift its overnight deposit rate by 50 basis points to 9.5% and the lending rate to 11.5%. It last raised the rates on February 10, its first change in over a year.

It said a rise in urban consumer inflation to 12.1% in the year to February "exceeded the central bank's comfort zone".

"The Monetary Policy Committee assesses that the balance of risks to the inflation outlook continues to be on the upside and today's decision aims at containing inflation expectations," the statement said.

It said high inflation in Egypt was driven originally by increases in food prices but had recently spread to other items.

"High international food prices are likely to continue exerting upward pressure on domestic food inflation, triggering further spillovers to non-food inflation," it said.

"Moreover, despite downward revisions to the global economic growth outlook, domestic growth is expected to maintain momentum, precipitating inflationary pressures."

The government expects the Egyptian economy to grow at 7% or a fraction higher in the 2007/8 financial year, which ends in June.

"The hike is part of the continued response to the rise in inflation in an attempt to curb the growth in liquidity and inflationary pressures stemming from economic growth," said Reham El-Desoki, senior economist at Cairo-based investment bank Beltone Financial.

Bankers said the two overnight rates remain below inflation and said the central bank would probably have to raise rates again by 25 or 50 basis points at its next meeting in six weeks' time.

But they said an emergency interest rate hike before the regular meeting on May 8 was most unlikely.

"We think that more rate rises will follow, plus a mild foreign exchange appreciation to adress imported inflation," said Simon Kitchen, senior economist at Cairo-based investment bank EFG-Hermes.

The central bank's overnight rates are its main instruments for controlling money supply and interest rates in general. The bankers said most banks would respond at once or within days by adjusting their rates for customers by the same amount. (Reuters)

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