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$12bn GCC AID BOOST

Egypt to keep main rates on hold as inflation down

Cairo, February 25, 2014

Egypt's central bank is expected to keep interest rates unchanged at a monetary policy meeting on Thursday, a Reuters survey shows, as officials seek to balance the need to stimulate the economy while curbing high inflation.

Egypt's economy has endured more than three years of political instability after the overthrow of autocrat Hosni Mubarak in 2011 deterred tourists and foreign investors.

The bank is under pressure to keep interest rates high to attract funds out of foreign currencies and into the Egyptian pound.

In its last monetary policy meeting Egypt kept its deposit rate at 8.25 per cent and its lending rate at 9.25 per cent. It also kept its discount rate and the rate it uses to price one-week repurchase and deposit operations at 8.75 per cent.

Five of six economists surveyed by Reuters expect the bank to keep rates unchanged on Thursday, while one expected it to cut them by 50 basis points.

"The central bank cut interest rates three times and we haven't seen the impact on credit growth, so they might want to take a breather. Inflation is decelerating but still remains high," said EFG-Hermes economist Mohamed Abu Basha.

Egypt's annual urban inflation rate slowed to 11.4 per cent in January from 11.7 per cent in December. Core annual inflation slid to 11.7 per cent in January from 11.9 per cent in December.

Supported by more than $12 billion in aid from Gulf states, Egypt launched two stimulus packages worth around 30 billion Egyptian pounds ($4.3 billion) each to spur growth in its ailing economy.

Unlike other analysts surveyed by Reuters, Jason Tuvey, assistant economist at Capital Economics, expects the central bank to cut rates on Thursday by 50 basis points as the Egyptian economy continues its recovery.

"Aid from the Gulf means that the central bank doesn't need to keep interest rates high in order to attract foreign capital inflows," Tuvey said.

"With inflation set to fall back and aid from the gulf propping up Egypt's external position, we think that the central bank will try to provide as much support to the economy as it can via looser monetary policy," he said.

Egypt's gross domestic product (GDP) grew a meagre real 1.04 per cent in the first quarter of this fiscal year - the three months to Sept. 30 - compared with 2.1 per cent in the same quarter of the year before.

GDP grew 2.1 per cent in the previous fiscal year, too little to make an impact on youth unemployment, estimated over 20 per cent. Official unemployment figures put it at 13 per cent.-Reuters




Tags: Egypt | inflation | GCC aid |

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