Bloomberg News

Egypt May Keep Key Lending Rate Unchanged as Revolt Hits Growth

June 08, 2011

June 9 (Bloomberg) -- Egypt’s central bank will probably keep its benchmark interest rate at the lowest level in more than four years, as economic fallout from the popular uprising against Hosni Mubarak offsets concern about rising prices.

The Monetary Policy Committee, led by Governor Farouk El- Okdah, will keep the overnight deposit rate at 8.25 percent, the lowest since November 2006, when it meets today, according to all six economists surveyed by Bloomberg News. The bank usually meets at 3 p.m. and announces the decision two hours later.

The turmoil that accompanied the overthrow of Mubarak in February may slow economic growth to 1 percent this year, the International Monetary Fund has said. That would be the lowest annual rate since 1992 in the country of about 80 million people. The government says it needs growth of about 7 percent to create enough jobs for a growing working-age population.

“Growth prospects are quite weak,” said Nada Farid, a Cairo-based senior economist at Beltone Financial.

Since the uprising, tourists have fled, foreign investors dumped Egyptian Treasury bills and factory output was hit by protests and strikes. The number of tourists visiting Egypt slumped by about 60 percent in March from a year earlier and tourist spending fell to $352 million from $1 billion, the government statistics agency said in May.

The economy will probably contract by 1.4 percent in the six months through June, according to the government’s economic program published on June 5. It forecasts growth for the fiscal year ending in June at 2 percent, down from 5.1 percent in the previous one.

Bank’s Dilemma

The central bank’s dilemma is that even as growth slows, quickening inflation means policy makers are more likely to raise rates than cut them, the economic program suggested.

The central bank “will remain vigilant and ready to tighten its policy stance if inflation pressures were to rise,” it said. “Inflation will remain broadly stable in the coming fiscal year, albeit at a relatively elevated level.” it said.

Egypt’s inflation rate climbed to 12.1 percent in April from 11.5 percent the month before. With food driving inflation the government is using other tools in a bid to quash price pressures.

“A cut right now is not so plausible because the last figures are beginning to signal a concern that many have on the inflation front,” John Sfakianakis, the Riyadh-based chief economist of Banque Saudi Fransi, said in a telephone interview. “The central bank doesn’t want to be viewed as an entity which is contributing to inflationary pressures.”

Egypt plans to boost spending on food and fuel subsidies in the next fiscal year to 124 billion Egyptian pounds ($21 billion), a 9 percent increase from this year.

IMF Loan

Egypt announced a $3 billion loan agreement with the IMF on June 5, as it seeks to finance a budget deficit forecast by the government to reach almost 10 percent of gross domestic product this fiscal year and 11 percent next year.

In March, the central bank introduced a seven-day regular repurchase agreement, or repo, to boost liquidity among banks that have borne the brunt of buying Treasury bills after foreign investors dumped Egyptian securities following the uprising. The crisis has driven the country’s benchmark EGX 30 stock index down nearly 24 percent this year.

The central bank has kept its benchmark interest rate on hold since September 2009.

--With assistance from Alaa Shahine in Dubai. Editors: Ben Holland, Andrew J. Barden

To contact the reporters on this story: Mariam Fam in Cairo at mfam1@bloomberg.net;

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.


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