Bloomberg News

Egypt Raises Key Interest Rate for First Time Since 2008

December 06, 2011

(Updates with comment from central bank in second paragraph.)

Nov. 24 (Bloomberg) -- Egypt’s central bank raised its benchmark interest rate for the first time since September 2008 to stem flight from the Egyptian pound amid the deadliest violence since the uprising in January that unseated President Hosni Mubarak.

The Monetary Policy Committee raised the overnight deposit rate to 9.25 percent from 8.25 percent and the overnight lending rate to 10.25 percent from 9.75 percent, the central bank said today on its website. All five economists surveyed by Bloomberg had anticipated that the central bank would leave rates unchanged. The central bank cited “upside risks” to the inflation outlook and increased uncertainty as reasons behind the rate hike.

“They’re trying to raise the deposits in Egyptian pounds versus the dollar since the dollar deposits have been increasing tremendously since the revolution,” Mona Mansour, co-head of research at Cairo-based investment bank CI Capital, said in a telephone interview. “This comes as a surprise. You need to not raise the interest rates to encourage investments and it will negatively impact the investment climate.”

Demonstrators in Tahrir Square, the center of almost a week of rallies and violence that has left at least 38 people dead, have called for the head of the ruling military council to quit. In a televised address to the nation on Nov. 22, Field Marshal Mohammed Hussein Tantawi outlined a series of concessions that include holding presidential elections by the end of June and replacing the current Cabinet. He also vowed to hold parliamentary elections as scheduled, starting Nov. 28.

Depleting Reserves

Concern that the unrest may deplete Egypt’s international reserves, already at their lowest level in six years, sent 12- month pound non-deliverable forwards to 7.2250 a dollar. That reflects bets for the currency to fall from 6.0030 per dollar over the life of the contracts. The violence forced the government to quit days after Finance Minister Hazem El Beblawi said he may ask the International Monetary Fund for a $3 billion loan.

The economy is struggling to recover from the aftermath of this year’s turmoil that ousted Mubarak in February, as tourists shun the country and factory output is hit by strikes. Gross domestic product grew 1.8 percent in the fiscal year that ended June 30, the lowest for at least a decade. The benchmark EGX 30 stock index is down more than 47 percent this year.

The annual inflation rate in urban parts of Egypt, the gauge that the central bank monitors, declined to 7.1 percent from 8.2 percent in September.

--Editors: Digby Lidstone, Mahmoud Kassem, Alan Crosby.

To contact the reporter 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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