In surprise move, Egypt hikes key interest rates again

CAIRO (Reuters) - Egypt’s central bank, faced with accelerating inflation, late on Thursday raised its key interest rates by 200 basis points for the second policy meeting in a row, confounding economists who had forecast it would hold them.

Central Bank of Egypt's headquarters is seen in downtown Cairo, Egypt, June 7, 2017. REUTERS/Mohamed Abd El Ghany

At a meeting of its Monetary Policy Committee, the bank raised the overnight deposit rate to 18.75 percent from 16.75 percent and its overnight lending rate to 19.75 from 17.75 percent, it said in a statement, after hiking them by 200 points each at the last policy-setting meeting in May.

Egypt floated its currency in November, and since then its pound has roughly halved in value. As the currency’s value dropped, inflation surged. Although the core rate slipped in May, it remains almost 30 percent year-on-year.

The central bank raised interest by 300 basis points after the currency floatation, which helped Egypt clinch a three-year $12 billion International Monetary Fund lending program tied to ambitious reforms such as tax hikes and subsidy cuts.

The IMF has said lowering inflation is key to keeping its economic reform program on track and that raising key interest rates could be an appropriate tool for doing so.

Ongoing reforms tied to the IMF loan program had increased risks for inflation, which the bank aims to reduce to 13 percent by end-2018, the bank said.

“Higher prices of hydrocarbon products effective June 29, 2017, higher value added taxes effective July 1, 2017, higher electricity prices scheduled for July 2017, as well as other potential regulated price adjustments further increase inflationary pressure,” it said.

Nine out of 10 economists polled by Reuters on Monday predicted the bank would leave its key interest rates unchanged.

Hany Farahat, senior economist at CI Capital, was the sole dissenter. He told Reuters on Thursday following the hike announcement that he did not expect it to be effective in combating inflation.

“We expected a rate hike despite our view that it will not reduce inflation. The central bank had no choice as it followed a very steep fuel price hike, which the finance ministry said would add 4 percent to inflation,” he said.

“Impact from the hike will be diluted as bank are now reluctant to pass on the rate increases on to their deposit and savings rates as a way of limiting costs. Accordingly, this step will not absorb additional liquidity from the system.”

Egypt’s economic growth has deteriorated since a 2011 uprising drove tourists and foreign investors away, draining foreign reserves and putting pressure on President Abdel Fattah al-Sisi who has to maintain support amid tough economic reforms that have sent inflation shooting up.

The government last week hiked fuel prices by up to 50 percent for the second time since November in another step to narrow its budget deficit. The hike would add 3 to 4.5 percentage points to inflation, Deputy Finance Minister Ahmed Kojak told Reuters on Monday.

Electricity Minister Mohamed Shaker said on Thursday Egypt will hike electricity prices by up to 42 percent this fiscal year for households as of Aug. 1 but keep energy subsidies in place three years longer than expected.

Reporting by Ehab Farouk and Eric Knecht; Writing by Ahmed Aboulenein; Editing by Larry King and James Dalgleish