By David Stamp
CAIRO, March 21 Egypt's central bank raised
interest rates on Thursday, hoping to curb soaring inflation and
slow a sliding pound currency, but the first increase in over a
year is likely to hurt a very weak economy.
The bank's Monetary Policy Committee (MPC) announced 50
basis point increases in both its main rates, taking the
overnight deposit rate to 9.75 percent and the overnight lending
rate to 10.75 percent.
Before the meeting, economists had been split on whether the
bank would raise rates or hold them to avoid further hurting an
economy badly damaged by two years of political turmoil and
frequent violent protests since the overthrow of president Hosni
In the end, the central bank opted to tackle the sharp rise
in inflation, which is eating into Egyptians' living standards,
and to support the Egyptian pound.
"Despite the downside risks to the GDP outlook, the MPC
judges that disanchored inflation expectations are more
detrimental to the economy over the medium term. Hence, a rate
hike is warranted," it said in a statement.
In a further blow to economic confidence, Moody's Investors
Service downgraded Egypt's sovereign credit rating on Thursday
to Caa1 from B3, citing unsettled political conditions, and said
risks of a default had increased.
The pound has lost 9 percent of its value against the dollar
since late last year, pushing up the cost of imported goods.
Inflation in towns and cities jumped to 8.2 percent in the year
to February from 6.3 percent in January.
The central bank blamed the jump in inflation on diesel fuel
supply problems and "broad-based increases in food and nonfood
prices on the back of the recent movements in the exchange
It also acknowledged the effect of Egypt's turbulent
politics. "The current political transformation may continue to
have ramifications on both consumption as well as investment
decisions, adversely weighing on key sectors within the
economy," it said.
Islamist President Mohamed Mursi called parliamentary
elections last month which had been due to start on April 22,
only for a court to cancel his decree. Much of the liberal and
leftist opposition had already said it would boycott the vote.
Thursday's rate rise is likely to hit economic growth, which
the government projects will be 3 percent in the year to June -
far below the 7 percent that economists believe is required to
create enough jobs for a rapidly expanding population.
With currency reserves now at a critically low $13.5 billion
- little more than a third of the level before Mubarak's fall -
the central bank is tightly rationing dollar supplies through
A $4.8 billion loan from the IMF has yet to materialise and
many investors and businesses are finding it nearly impossible
to get hold of dollars through the banking system. This is
forcing them to accept highly unfavourable black market rates,
often wiping out their profits.
The central bank also said on its website that it had
raised its main repo and deposit auction rates by 50 basis
points to 10.25 percent and the discount rate by 75 basis
points, also to 10.25 percent.
It last changed monetary policy in November 2011 when it
raised the overnight deposit rate by 100 basis points and the
overnight lending rate by 50 basis points.