Egypt's central bank kept its key overnight interest rates steady on Thursday in a bid to foster economic growth without reigniting the high inflation that sparked unprecedented protests against the government.
Egypt's economy nearly ground to a halt during weeks of protests that toppled the government of former President Hosni Mubarak in February, and some of its main sources of foreign exchange, including tourism and foreign investment, have collapsed.
Beltone economist Nada Farid said the central bank left its key overnight interest rates steady to balance combating inflation and supporting economic growth.
The central bank has “two conflicting challenges, and the safest solution is to maintain policy rates as is, at least till the upcoming meeting in June," Farid said.
The central bank said the political shakeup would "adversely weigh" on the economy and continue to impact consumption and investment. Meantime, a global recovery is uncertain due to higher international oil prices and political unrest, it said.
"The expected slowdown in economic growth could largely offset the upside risks in inflation from rising international food prices," it said in a statement, citing the possibility of higher inflation if global food prices continue to rise.
Driven by soaring food prices, annual urban consumer inflation accelerated in March to an 11-month high of 11.5 percent. Core inflation, which strips out subsidized goods and volatile items including fruit and vegetables, eased to 8.54 percent from 9.51 percent.
"The economic outlook remains very negative, and inflation will still remain a problem in tandem with rising global food prices, which we expect will further increase," Farid added.
Beltone Financial forecast inflation to average 11.2 percent for the current fiscal year to end June, and rise further to an average of 13.8 percent the following year, driven mainly by rising global food prices and currency depreciation.
The central bank kept the overnight lending rate at 9.75 percent and the deposit rate at 8.25 percent, it said on its website, its 13th pause since it stopped lowering rates in September 2009.
It also left the discount rate unchanged at 8.5 percent, and the seven-day repurchasing agreements unchanged at 9.25 percent interest rate.
The decision was in line with eight out of nine analyst forecasts in a poll taken this week. One economist saw a 50 basis point cut to support economic growth.
A collapse in tourism and foreign investment following the political turmoil has hit revenues hard and economists suspect the economy of the most populous Arab country contracted 7 percent in January-March from the previous quarter.
The International Monetary Fund projects Egypt's economic growth to plunge to 1 percent this year after a 5.1 percent expansion in 2010.
Several economists forecast inflation to continue rising in April due to higher oil and food prices, but they expect the central bank to keep rates steady on its next meeting to support an economy reeling from the impact of the recent popular revolt.
JP Morgan economist Brahim Razgallah said he expected rates to remain as they are for the rest of the year. However, he also saw a chance of a rate cut later in the third or fourth quarter "if inflation comes down significantly."
Raising rates to combat food-driven inflation would have limited or no effect on overall prices, analysts say.
"Any change in rates in 2011 will be a very slight cut to support growth," Farid said. "The growth outlook looks much more on the negative side than the inflation outlook."
Egypt's finance minister has estimated that the political turmoil would reduce economic growth to between 2.5 and 3 percent in the financial year to end in June. The government's previous forecast before the uprising was 6 percent.
The economy grew by 5.1 percent in the fiscal year that ended 30 June, 2010. The government believes it needs at least 6 percent growth to generate enough jobs and absorb new entrants into the labor force.
The central bank's Monetary Policy Committee will meet next on 9 June.
