Sunday, Dec 09, 2012
(This article was first published on Thursday)
By Matt Bradley
CAIRO--The Central Bank of Egypt kept its key current interest rates unchanged Thursday as mounting political instability further threatened the country's economic growth prospects.
The central bank's Monetary Policy Committee said it will keep the overnight deposit rate and overnight lending rate unchanged at 9.25% and 10.25, respectively, and the discount rate unchanged at 9.5%.
The decision comes amidst one of the gravest political crises to strike Egypt since protesters forced former President Hosni Mubarak from power nearly two years ago.
Islamist-backed President Mohammed Morsi angered activists last month when he awarded himself expanded political powers, placing his authority out of reach of a judiciary that Mr. Morsi says is stocked with loyalists of the previous regime. The decision sparked protests from the president's opponents that last night erupted into violence leaving six people dead. At the end of trading Thursday, Egypt's EGX30 stock market index had fallen by 4.6%.
In a statement released with the rate decision, the central bank said lowering rates could add more downward pressure on the Egyptian pound.
"Given the heightened uncertainty that faced market participants since early 2011, investment levels remained low," the central bank said. "Given the balance of risks surrounding the inflation and GDP [gross domestic product] outlooks and the uncertainty at this juncture, the MPC judges that the current key CBE rates are appropriate."
The bank noted that inflation remains under control, with the headline consumer price index having risen only 0.79% in October to an annual inflation rate of 6.7%.
Economic growth has slowed. For the first quarter of the 2012/2103 fiscal year ending September the economy grew 2.6%, down from 3.3% from the previous quarter, according to the central bank.
The central bank said it is reluctant to lower rates and give investors more reason to withdraw their investments from Egypt.
Nearly two years after its revolution rattled investors and frightened tourists, Egypt is facing a balance of payments crisis. The central bank has used up more than half of its foreign currency reserves in the past nearly two years to defend the Egyptian pound, which reached its lowest level in eight years Wednesday following the deadly clashes at the presidential palace.
Egypt's foreign currency reserves dropped to $15.04 billion at the end of November--only slightly above the three months of import cover the International Monetary Fund recommends countries maintain.
The Egyptian pound was trading at EGP6.13 to the dollar on Thursday.
The country has been locked in negotiations for a $4.8 billion loan from the IMF that policy makers hope will inspire investor confidence and bolster foreign currency reserves.
The government signed a staff level agreement with the IMF in November, but the escalating constitutional crisis appears to have delayed negotiations.
"There seems to have been some progress but that has been cast into doubt by unrest," said Neil Shearing, an Egypt analyst at the London-based consultancy Capital Economics, of the IMF loan.
In a note released Thursday, Capital Economics said that the Bank could decrease interest rates as early as the first half of next year if the IMF loan is approved.
"By contrast, if things remain as they are, we wouldn't be surprised to see the CBE forced into defensive interest rate hikes to stem capital outflows," said the consultancy.
Write to Matt Bradley at matt.bradley@dowjones.com
(END) Dow Jones Newswires
09-12-12 0337GMT
