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Sat 9 Feb 2008 12:45 PM

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Egypt raises rates to tackle soaring food prices

Rising prices cause inflation to jump to 10.5% in January, reversing decline.

Egypt's central bank said on Friday it had raised its key overnight interest rates, the first rate change in over a year, due to higher food prices and inflationary pressure from surging economic growth.

The 25 basis point rise comes the same week the country's cabinet said January inflation had jumped to 10.5%, reversing a steady decline since September.

The bank raised its deposit rate to 9% and its lending rate to 11%.

"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.

Rising international food prices had driven up costs in Egypt, which in turn has spilled over into non-food inflation, the bank said.

Expansion of Egypt's economy, which grew at its fastest rate in decades in the fiscal year ending last June, may also add to upward pressure on prices, it said.

"The MPC (monetary policy committee) 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 bank said.

Egypt's economy has benefited from an influx of petrodollar investment from the Gulf Arab region and from reforms such as tax cuts and privatisation of state companies, but the government has been unable to keep a lid on prices.

After Egypt raised fuel prices by 30% for standard petrol in July 2006, inflation rose steadily to 12.8% by March 2007. An outbreak of bird flu also helped push up prices.

Annual inflation was 9.3% in September, when the statistics agency introduced a new consumer price index, but had dropped each month before January.

"The central bank reacted quickly to signs of a rebound in inflation, which is a good thing," said Reham El-Desoki, senior economist at Beltone Financial, a Cairo-based investment bank. "Inflation is likely to remain high in the medium term."

High inflation would make the government cautious of raising energy prices, which it hoped to do as part of a plan to reduce the country's budget deficit, she said.

Egypt said in August it would cut electricity and gas subsidies over the next three years for energy-intensive industries.

Egypt was targeting inflation of between 6% and 7%, Prime Minister Ahmed Nazif was quoted as saying in December by state-owned newspaper Al-Ahram.

The central bank said it would continue to monitor economic developments, including factors underlying inflation, and would adjust rates if needed to ensure price stability over the medium term. (Reuters)

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