Egypt Central Bank Seen Keeping Rates on Hold as Inflation Eases

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Egypt’s central bank is expected to keep interest rates on hold on Thursday as inflationary pressure begins to ease after a spike following deep cuts to government energy subsidies in July.

The economy has been in turmoil since a popular uprising ousted autocrat Hosni Mubarak in 2011, deterring tourists and foreign investors and straining the country’s finances.

To help bring down its swelling budget deficit, the government in July slashed energy subsidies, raising energy costs for companies and consumers by up to 78 percent.

That pushed up prices and hit business activity in July. But the effect appears to have been short-lived, with the pace of economic activity picking up in the two months since and inflation beginning to ease in September.

Five economists surveyed by Reuters all forecast that the central bank would keep its overnight rates unchanged at 10.25 percent for lending and 9.25 percent for deposits at its policy-setting meeting on Thursday.

“There was little sign really that there was any sort of indirect or second-round effects on inflationary pressure from the subsidy cuts,” said Mohamed Abu Basha of EFG Hermes.

“It’s more of a wait-and-see before the next decision for the central bank.”

Urban consumer inflation eased to 11.1 percent in September after surging to 11.5 percent in August in the wake of cuts to fuel and electricity subsidies. Core inflation eased to 9.15 percent in September from 10.07 percent the previous month.

The central bank raised benchmark interest rates at its meeting on July 17 in an unexpected move aimed at keeping inflation in check after the subsidy cuts. It kept rates on hold at its last meeting.

Egypt has received billions of dollars in aid from Gulf states and implemented two stimulus packages, but economic recovery in the most populous Arab nation has been slow. The economy expanded 2.2 percent in the 2013/14 fiscal year which ended in June.

But in the last quarter output grew 3.7 percent, suggesting the recovery was gaining strength. A recent Reuters poll suggested growth could reach 3.3 percent this fiscal year as Egypt pushes ahead with big projects such as a Suez Canal expansion it hopes will create jobs and restore confidence.

Nada Farid of Beltone Financial said that declining global oil and food prices would also help keep inflation under control, reducing the need to raise interest rates this month.

The global oil benchmark has declined more than 20 percent from the 2014 high in June, easing the imported element of inflationary pressure.[O/R]

“Growth is gradually picking up and is expected to pick up in light of the planned mega-projects,” Farid said, referring to infrastructure plans such as the expansion of the Suez Canal.

“However, it is a bit early to reduce rates until inflation expectations are well anchored.”

Source: Reuters

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