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Egypt Central Bank ‘Ready to Tighten’ on Price Pressures

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June 6 (Bloomberg) -- 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, the Finance Ministry said.

Egypt yesterday announced a $3 billion loan agreement with the International Monetary Fund to fund its widening budget deficit after a popular revolt earlier this year ousted President Hosni Mubarak. The turmoil that accompanied the uprising has hurt revenue from tourism and industrial output.

The central bank “will remain vigilant and ready to tighten its policy stance if inflation pressures were to rise,” according to Egypt’s economic program for the fiscal year starting July 1. “Inflation will remain broadly stable in the coming fiscal year, albeit at a relatively elevated level,” said the document posted on the ministry’s website.

The comments signal that the 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 current fiscal year 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,” Mona Mansour, co-head of research at Cairo-based investment bank CI Capital, said by phone today. “At the same time, they cannot increase rates because they want to encourage investment. It’s most probable that they will maintain as is.”

Food Prices

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 factors behind the uprising that unseated Mubarak.

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

The bank, which is independent under Egyptian law, 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 ministry said.

The consolidated general government’s debt-to-gross domestic product ratio is expected to decline to 65 percent by the end of the fiscal year that ends in June 2016 according to the June 5 ministry document. That’s down from an increase to 77 percent for the next fiscal year, the ministry said, after an expected 75.5 percent this year.

The central bank is committed to maintaining “a flexible exchange rate that reflects the underlying forces of demand and supply,” while “avoiding excessive short-term volatility,” according to the document. In the last six months, the Egyptian pound has depreciated by 2 1/2 percent against the U.S. dollar, it 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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