After Subsidies Cut, Egypt Raises Key Rates to 9.25% to Contain Inflation

The Central Bank of Egypt on Thursday raised key interest rates by 100 basis points each to keep inflation in check.

The move came two weeks after Egypt’s government substantially raised prices of several regulated items in order to reduce the government’s subsidies bill, which was hurting the cash-strapped Arab country.

The government earlier this month revised up the prices of items such as fuel, electricity and tobacco as part of its 2014-2015 fiscal consolidation plan, which, the Egypt central bank said, will improve the fiscal sustainability over the medium-term but also increase prices.

The Monetary Policy Committee, in a statement posted on the Egyptian central bank website, said “a pre-emptive rate hike is warranted to anchor inflation expectations and hence limit a generalized price increase, which is detrimental to the economy over the medium-term.”

The Monetary Policy Committee raised the overnight deposit rate, overnight lending rate, and the rate of the central bank’s main operation each by 100 basis points to 9.25%, 10.25%, and 9.75%, respectively. The discount rate was also raised by 100 basis points to 9.75%, it said.

The MPC added that it will continue to closely monitor economic developments and will adjust key rates to ensure price stability over the medium-term.

“The Egyptian central bank’s surprise decision to hike interest rates today appears to have been in anticipation of a sharp rise in inflation over the coming months,” said Jason Tuvey, an economist at London-based Capital Economics.

“This follows the government’s recent move to raise energy prices. However, economic growth remains weak and financial support from the Gulf continues to support Egypt’s balance of payments position. As such, we think today’s move could ultimately prove to be a one-off,” Mr. Tuvey added in a note to clients.

The annual inflation rate remained broadly unchanged at 8.2% in June. Cairo-based EFG Hermes expects inflation to jump into double digits and likely peak at 15% year-over-year by mid-2015.

Source: The Wall Street Journal