CAIRO: 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 had 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 a battered economic growth. "They (central bank) have 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 continue to impact consumption and investment, "adversely weighing" on the economy, while global recovery was uncertain due to higher international oil prices amid political unrest in the region. "The expected slowdown in economic growth could largely offset the upside risks on inflation from the rising international food prices," it said in a statement, citing an upside risk to the inflation outlook if rises in global food prices were persistent. Annual urban consumer inflation accelerated in March to an 11-month high of 11.5 percent, driven by soaring food prices. 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 in the fiscal year to end June and further rise to an average of 13.8 percent in the following year, mainly driven 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. Economy Vs Inflation A collapse in tourism and foreign investment following the political turmoil has hit revenues hard and economists forecast 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 1.0 percent this year after a 5.1 percent expansion in 2010. Several economists forecast inflation will 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 popular revolt. JP Morgan economist Brahim Razgallah said he expected rates to stay on hold 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 2.5-3 percent in the financial year to end-June from the government's previous forecast of 6 percent. The economy grew by 5.1 percent in the fiscal year that ended June 30, 2010. The government believes it needs at least 6 percent growth to generate enough jobs to absorb new entrants to the labor force. The central bank's Monetary Policy Committee will next meet on June 9.
