Egypt raised interest rates for the first time in more than a year in an attempt to curb inflation, and the central bank said it has agreed with the government to collaborate on designing policies that “will contribute positively to economic growth and job creation.”
The Monetary Policy Committee, headed by Governor Tarek Amer, increased the benchmark overnight deposit rate by 50 basis points to 9.25 percent, according to a statement on the central bank’s website. The overnight lending rate was also increased by the same amount to 10.25 percent. Headline urban inflation accelerated to 11.1 percent at the end of November, the highest in five months.
“The MPC judges that a rate hike is warranted to address inflationary pressures and anchor inflation expectations,” the bank said in the statement.
The decision comes amid a dollar crunch threatening Egypt’s fragile economic recovery, triggering speculation that the central bank may loosen its grip on the pound. Officials have blamed part of the foreign-currency squeeze on imports of goods they say Egypt doesn’t need.
In its statement on Thursday, the central bank said key elements of the framework it’s working on with the government include narrowing the country’s budget deficit to “sustainable levels” and avoiding double-digit inflation over the medium- term. They also agreed to work toward reducing Egypt’s trade deficit “by initiating a strategy aimed at encouraging local production to meet domestic market needs and enhance imports substitutions.”
The central bank delayed a scheduled rates meeting on Dec. 17 for a week, saying it can’t fulfill its price-stability mandate without “full coordination” with the government in areas including “targets for fiscal consolidation, current account outturns and the implementation of urgent structural economic reforms.” The statement was followed by a meeting of the so- called Coordinating Council, which the governor, top ministers, as well as outside experts such as Mohamed El-Erian, the former chief executive office of Pacific Investment Management Co.
The council will meet again Jan. 10, the central bank said on Thursday. The central bank is independent under Egyptian law.
The last change to the benchmark rate was a half percentage point cut in January, when the central bank cited a weaker inflation outlook following the plunge in global energy prices.
– Bloomberg [With assistance from Ahmed Feteha and Rinat Gaynullin].