Soaring Inflation Drives CBE To Raise Lending, Deposit Rates By 50 BPS

The Central Bank of Egypt’s Monetary Policy Committee has raised benchmark overnight deposit and lending rates by 50 basis points to reach 9.75% and 10.75%, respectively in its meeting last Thursday due to the increasing risks endangering Egypt’s economy, most prominently the dramatic increases in inflation which will, if it continues to rise, have negative repercussions on economy on the average term.

The urban consumer Inflation increased to 2.5% month-on-month in February, the fastest rise since August 2010, translating into a year-on-year increase of 8.2%.

The core inflation rate registered a monthly increase of 2.86% in February, compared to 1.31% in January. The core inflation rate registered an annual increase of 7.68% in February, compared to 4.44% last December.

These increases came as a result of the hike in the prices of many food and non-food items as a result of the recent changes in the exchange rate and diesel distribution bottlenecks across the country. While the probability of a rebound in international food prices is likely in light of recent global development, the re-emergence of local supply bottlenecks and distortions in the distribution channels pose upside risks to the inflation outlook.

GDP rose to 2.4% in the first half of FY 2012/2013, compared to 2.2% in FY 2011/2012, thanks to the nascent recovery in the construction and tourism sectors. However, GDP is suppressed by continuing weakness in the manufacturing sector. Given the uncertainty that faced investors since the beginning of 2011, investment levels remained low.

The MPC expected that the current political conditions will continue to affect consumption and investment decisions. In addition, downsize risks continue to surround the global recovery amid the challenges facing the Euro zone. These factors may lead to increasing the downside risks to GDP in the future.

The MPC also decided to raise the rate of the CBE’s main operation by 50 basis points to 10.25%. The discount rate was raised by 75 basis points to 10.25%.