Egypt's central bank raised its key interest rates by 50 basis points, saying inflationary expectations are more harmful to the economy over the medium term despite the risks to the outlook for growth.
The Central Bank of Egypt (CBE), which last raised rates in November 2011, said it was closely monitoring all economic developments and would not "hesitate to adjust the key CBE rates to ensure price stability over the medium‐term."
Egypt's headline consumer price inflation rose by a monthly 2.5 percent in February - the highest monthly rise since August 2010 - to an annual rate of 8.21 percent due to broad increases in food and non-food prices on the back of changes in the exchange rate and dielsel distribution bottlenecks across the country, the central bank said.
"While the probability of a rebound in international food prices is less likely in light of recent global developments, the re‐emergence of local supply bottlenecks and distortions in the distribution channels pose upside risks to the inflation outlook," the CBE said, adding:
"Despite the downside risks to the GDP outlook, the MPC judges that disanchored inflation expectations are more detrimental to the economy over the medium term. Hence, a rate hike is warranted."
The CBE raised its overnight deposit rate by 50 basis points to 9.75 percent, the overnight lending rate to 10.75 percent and the main operation rate to 10.25 percent. The discount rate was raised by 75 basis points to 10.25 percent.
Egypt's Gross Domestic Product expanded by 2.2 percent in the fourth quarter from the third quarter for annual growth of 2.2 percent, down from 2.5 percent in the third quarter.
The central bank said economic growth was suppressed by continuing weakness in the manufacturing sector and investment is low given heightened uncertainty.
"While the slowdown in economic growth has been limiting upside risks to the inflation
outlook, there is a possible build‐up of upward pressures on inflation going forward for
the previously mentioned reasons," the CBE said.