Egypt Central Bank ‘Ready to Tighten’ on Price Pressures

Egyptian central bank policy makers will be “vigilant” to prevent new price pressures even as inflation is expected to remain stable near current “elevated” levels.

Egypt yesterday announced a $3 billion loan agreement with the International Monetary Fund as the North African country seeks to fund its widening budget deficit after a popular revolt earlier this year ousted President Hosni Mubarak.

The central bank “will remain vigilant and ready to tighten its policy stance if inflation pressures were to rise,” according to the country’s economic program for the fiscal year starting next month.

“Inflation will remain broadly stable in the coming fiscal year, albeit at a relatively elevated level,” said the document entitled “Egypt’s Economic Program” posted on the Ministry of Finance website.

The comments signal that the Cairo-based central bank may not lower interest rates even as the economy reels under the effects of the revolt. Economic growth may slow to 2.6 percent in the fiscal year that ends this month compared with 5.1 percent in the previous year, Finance Minister Samir Radwan has said.

“A cut is unlikely because there are high inflationary pressures; at the same time, they cannot increase the rates because they want to encourage investments,” Mona Mansour, the co-head of research at CI Capital, the Cairo-based investment bank, said in a phone interview. “It’s most probable that they will maintain as is.”

‘Broadly Appropriate’

Inflation in urban parts of the country, the benchmark rate that the central bank monitors, accelerated to an annual rate of 12.1 percent in April from 11.5 percent in the previous month, fueled by rising food prices, one of the reasons that sparked the uprising that unseated Mubarak.

If there’s “a big hike in prices,” in the future, then the central bank may consider tightening, Mansour said.

The central bank, which is independent under Egyptian law, has left its benchmark overnight deposit rate at 8.25 percent on April 28, the lowest level since November 2006. Justifying the decision, the bank said the “expected slowdown in economic growth could largely offset the upside risks on inflation.”

“Given the nature of inflation and the weakness of domestic demand, the current monetary policy stance remains broadly appropriate,” the document dated June 5 said.

To contact the reporter on this story: Alaa Shahine in Dubai at asalha@bloomberg.net Mariam Fam in Cairo at fam@bloomberg.net

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

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