Thursday, August 14, 2008

Egypt's central bank seen raising rates again this year

Egypt's central bank, which has already raised overnight interest rates by 225 basis points this year, is seen likely to increase them again, by at least 50 bps, by the end of 2008 as it battles inflation at a 16-year high.

Five out of eight economists interviewed by Reuters on Tuesday and Wednesday said they expected the bank to nudge rates higher by 50 more basis points (bps) to 11.5 percent for deposit and 13.5 percent for lending in what would be its sixth rate hike this year.

One economist said the bank could raise rates by up to 75 basis points, while another expected the deposit rate to hit 12.5 percent. Only one economist predicted that the rates will remain unchanged.

Rising food prices drove urban inflation to 22 percent in the year to July, from 20.2 percent in the year to June.

"As long as inflation remains quite high during the rest of this calendar year, the central bank will continue to have an obligation to show how concerned it is," said David Lubin, an emerging markets economist at Citigroup in London.

"Inflation is going to stay above 20 percent in August and may dip slightly below that in September, but it remains far too high," he added.

Lubin said he expected the central bank to raise rates by 50 basis points before starting to cut them in early 2009 as inflation falls due to base effects. The central bank's Monetary Policy Committee, which meets every six weeks, has three more meetings this year, the first on September 18.

With the economy growing at its fastest pace in decades, rising inflation has emerged as a tough challenge for the government in a country that has a low per capita income and a high poverty rate relative to other Middle East nations.

Food price rises triggered violent protests in some areas in the country this year. This prompted the government to raise public sector salaries by 30 percent and then nudge up fuel prices to finance the wage increase.

Ania Thiemann, senior Middle East and North Africa analyst at the Economist Intelligence Unit, said the central bank is likely to raise rates by 50 basis points in the remainder of 2008 and then pause to monitor the prices of global commodities.

She said the Economist Intelligence Unit forecasts that international commodity prices will fall in 2009.

Many economists doubt that monetary policy tightening alone is enough to bring down inflation because of abundant liquidity in the banking system. Some expect the central bank to allow the Egyptian pound, which has gained more than 7 percent against the dollar over the past two years, to appreciate more.

"Another rate hike is not going to do much to current inflation," said Caroline Grady, an emerging markets economist at Deutsche Bank. She expected rates to rise by 50 basis points.

"The effect will be down the line, so it depends on how much more they feel they need to anchor inflation expectations."

Grady said the central bank may push rates higher by more than 50 bps "because to have these negative real interest rates is pretty unprecedented, but if you look back to 2006, real interest rates were pretty negative but they didn't move much."

But Matthew Vogel, head of EMEA research at Barclays Capital in London, said he expected the central bank to raise rates by 150 basis points to 12.5 percent for the deposit rate.

"They are supposed to be targeting inflation and they cannot justify having policy rates so low," he said.

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