Egypt unexpectedly raises interest rates by 200 basis points

10Jul 2017
The Guardian Reporter
The Guardian
Egypt unexpectedly raises interest rates by 200 basis points

Egypt’s central bank unexpectedly raised its benchmark interest rates by 200 basis points for the second time this year in an effort to control inflation after the government raised fuel and electricity prices.

The Monetary Policy Committee, led by Governor Tarek Amer, raised the overnight deposit rate to 18.75 percent, a record high, the bank said on Thursday. The lending rate was also raised to 19.75 percent. All but one of the eight economists surveyed by Bloomberg had forecast the rates would remain unchanged.

The decision brings the total increase in borrowing costs to 700 basis points since the central bank floated the pound in November before securing a $12 billion loan from the International Monetary Fund. The weaker currency, coupled with cuts in fuel and electricity subsidies, has helped drive inflation to about 30 percent. The IMF in April signaled a preference for curbing inflation through interest rates.

The “temporary” rate hike was aimed at easing the effect of recent subsidy cuts and tax increases, which tilted inflation risks “more strongly to the upside,” the bank said. It said that the necessary measures will be taken to lower inflation to 13 percent by the end of next year, and that the bank envisages “a measured easing of the monetary stance” as soon as underlying inflation begins to slow.

Impact ‘diluted’Hany Farahat, an economist at Cairo-based CI Capital Holding and the only one surveyed by Bloomberg who’d predicted a rate increase, said his expectation was based on the steep fuel-price hikes and the IMF’s backing for higher rates. But he said that an appreciation of Egypt’s currency would be a “more constructive” way of capping inflation.“The impact of today’s hike would be diluted as banks are unlikely to pass it on to their deposit and savings rate,” he said.

The government on Thursday raised household electricity prices by as much as 42 percent, just a week after it increased fuel prices. The decisions add more pressure on Egypt’s 93 million population, half of which lives near or below the poverty line. Consumer prices rose 29.7 percent in the 12 months through June.

The central bank last raised interest rates by 200 basis points in May, saying the move was to contain “demand-side pressures.” 

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