Egypt Holds Rates as Oil Price Rise Stokes Inflation Worries

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Egypt Holds Rates as Oil Price Rise Stokes Inflation Worries

  • Oil price poses ‘upside risk’ to Egypt’s inflation outlook
  • Rise in U.S. yields complicates timing of further cuts: Khan

Egypt’s central bank kept its benchmark interest rate unchanged on Thursday, as the government prepares for a new round of fuel subsidy cuts against a backdrop of rising global oil prices.

The bank’s Monetary Policy Committee, headed by Governor Tarek Amer, held the overnight deposit rate at 16.75 percent -- in line with predictions by five out of eight economists surveyed by Bloomberg. The overnight lending rate was kept at 17.75 percent.

The increase in international oil prices “gained momentum in April and May 2018, leading to the materialization of an upside risk to the domestic inflation outlook,” the MPC said in a statement. Even so, it said that the outlook “remains consistent” with achieving the inflation target of 13 percent (+/-3 percentage points) in the fourth quarter of 2018.

Brent crude has risen 19.3 percent since the beginning of 2018, to almost $80 per barrel.

The decision came after the month-on-month inflation rate accelerated to 1.5 percent in April, its fastest pace in nearly a year, spurred by the approach of the holy month of Ramadan when food prices tend to spike. The steep cut in fuel subsidies planned for later in the year is a key part of an International Monetary Fund-backed program to revive the economy by cutting spending and attracting foreign investment.

The measures have the potential to undercut progress the central bank has made in lowering annual inflation that had surged to more than 33 percent following the 2016 decision to float the currency. Annual inflation eased to 13.1 percent in April, well within the central bank’s target range, as the regulator cut rates this year by 200 basis points.

The rise in oil prices means that the central bank will proceed with “caution” as it unwinds high borrowing costs, said Bilal Khan, a senior economist at Standard Chartered Bank. Additionally, “the recent rise in US yields could complicate the timing of cuts further.”

Foreign investors, who flocked to Egypt after currency controls were scrapped, have pumped over $23 billion into local currency Treasury bills. Keeping interest rates higher would leave Egypt competitive as returns rise across emerging markets.

— With assistance by Mirette Magdy

(Updates with inflation chart, analyst comment.)