July 8, 2017 / 9:59 AM / a year ago

UPDATE 2-Egypt's deputy finance minister sees rate hike as temporary

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By Ehab Farouk

CAIRO, July 8 (Reuters) - Egypt’s deputy finance minister Mohamed Meait said on Saturday he expected the rise in interest rates to control inflation would be temporary as he sees inflation falling early next year.

The central bank, faced with accelerating inflation, on Thursday raised its key interest rates by 200 basis points for the second policy meeting in a row, wrongfooting economists who had forecast no change.

“We expect the interest rate decision to be a temporary measure to target inflation,” Meait told Reuters. “We expect inflation to fall in early 2018 and thus (we can) begin cutting interest rates.”

Egypt floated the pound in November, and since then the currency has roughly halved in value, sending inflation surging. Although the core inflation rate slipped in May, it remains at almost 30 percent year-on-year.

Meait also said the two increases in base lending rates this year were not taken into account in the state budget for the 2017/18 fiscal year, which parliament passed last week.

The interest on current and future debt was calculated at 381 billion pounds, said Meait, who expected adjustments to that figure in the light of the change in borrowing costs.

The budget has yet to be ratified by President Abdel Fattah al-Sisi.

The central bank raised interest rates by three percentage points after the currency flotation, which helped Egypt clinch a three-year $12 billion International Monetary Fund lending programme tied to reforms such as tax hikes and subsidy cuts.

The IMF has said lowering inflation is crucial to keeping the reform programme on track and that raising interest rates could be an appropriate tool for doing so.

The central bank has said it aims to cut inflation to 13 percent by the end of next year.

The government last week increased fuel and electricity prices by up to 50 percent for the second time since November in another step towards narrowing its budget deficit. More rises are expected.

“The average interest rate on domestic borrowing rate is currently between 19 and 20 percent and this average may fall in the second half of 2018 to 18 percent,” Meait said.

Interest on debt costs for 2016-2017 had exceeded the target but cannot be announced at the moment,” he added.

Thursday’s move drew criticism from businessmen working in different industrial sectors who say they still haven’t recovered from May’s interest rate hike.

The interest rate increase “will have a devastating impact on industry (in general) and the pharmaceutical sector,” said Hossam Aboul El Enein, SEDICO Pharmaceutical Company chief executive officer.

He told Reuters that the cost of borrowing had increased and energy prices had risen while the prices of medicines could only be changed by ministerial decision.

“I expect a shortage of medicines in the coming period,” he said, adding that he wondered how drug companies would make a profit given current prices. (Reporting by Ehab Farouk; Writing by Amina Ismail; editing by John Stonestreet and Stephen Powell)

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