Central Bank keeps interest rates on hold

The Central Bank of Egypt’s monetary policy committee elected Thursday to leave its benchmark interest rates unchanged. The bank’s overnight deposit rate will remain at 11.75 percent, its overnight lending rate at 12.75 percent, and the rate of the CBE’s main operation at 12.25 percent. The discount rate was also kept unchanged at 12.25 percent.

Central banks often raise interest rates as a tool to fight inflation and support the local currency, but doing so risks suppressing overall economic growth and raising interest costs for government debt. “At this juncture, the [committee] judges that the key CBE rates are currently appropriate given the balance of risk surrounding the inflation and GDP outlooks,” the committee wrote in a press statement.

The CBE noted the high annual inflation rates in June — 13.97 percent headline inflation and 12.37 percent core inflation, according to the bank’s calculations— but argued that the high annual figures were largely due to unfavorable base effects from the previous year, high monthly inflation in May and the seasonal effect of the Eid al-Fitr holidays.

The bank noted that overall economic activity has been “unfavorably impacted by domestic as well as external factors.”

Ahead of Thursday’s announcement, economists were split as to whether they anticipated a rate hike, with the majority expecting rates to be held steady. In light of Egypt’s soaring inflation and pressure on the pound most expect to see rates increase sometime this year.

“The decision by the MPC not to hike today reflects concerns about harming the already-sluggish economy,” William Jackson, an emerging markets expert at Capital Economics, said in an email statement. “Despite today’s decision, we continue to think additional monetary tightening is likely this year. The inflation outlook is poor as things stand. Moreover, the conditions attached to any IMF deal are likely to involve another currency devaluation as well as fiscal measures (e.g. VAT and subsidy reforms) that would push inflation up further.”

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