CAIRO: The Central Bank of Egypt's (CBE) Monetary Policy Committee left overnight interest rates unchanged at their meeting on Thursday. Rates have hovered at 9.75 percent lending and 8.25 percent deposit since September after the committee issued six rate cuts in 2009 to stimulate economic growth. With the luxury of stable and relatively low inflation, the CBE seems to have balanced inflationary pressure and the lingering effects of the economic slowdown. Investment bank Beltone Financial predicted in a note that rates would remain unchanged until late 2010, "when a possible decline in inflation could result in a rate cut by the CBE. Prior to the committee's decision, Beltone had foreseen their choice, explaining, "We do not expect the CBE to be inclined to change interest rates.for lack of reasons supporting a move either way. "Inflation is still currently relatively high to warrant a rate cut.On the other hand, we do not believe a hike in rates would be effective, at this point, despite our expectation of a higher inflation level in March 2010 leading to a slower than expected decline in headline inflation in the coming months. Beltone attributed both the expected rise in headline inflation, and its current low level, at 12.8 percent in February, to prices of fuel and food. "The dissipation of the effect of a shortage in butane gas and steady food price rises led to [the recent] decline in headline inflation.The higher than expected inflation in March would be driven by the increase in price of diesel (gas oil) on the black market. Other changes in headline inflation are fueled by changes in the prices of food items. Prior to the CBE's announcement, several analysts voiced concurring predictions for rates to remain untouched. Reham ElDesoki, chief economist at Beltone, expanded on their statement. "I don't think there will be a change in interest rates at the upcoming meeting. Growth is stabilizing at 5 percent and headline inflation will come down, according to our expectations, in 2010, but it is still high at 12.8 percent, so there is no supporting evidence for a cut or increase in rates. "We expect the CBE could keep rates unchanged in the first half of 2010, with the decision to cut rates further being dependent on whether inflation does decline below the single digit level in quarter three of 2010 or not. Asked to comment on the opposing pulls of stimulating economic growth and keeping inflation low, ElDesoki said, "The CBE's main objective is price stability. If inflation is low or not a concern then it could act in support of growth. She concluded that the effect of low interest rates on depositors likely does not weigh heavily on their decision. Bank of America Merrill Lynch economist Turker Hamzaoglu said in a research note that the CBE is "unlikely to hike until the first half of 2011, when investment driven Egyptian growth will start jumping to about 6.5-7 percent with the recovering capital inflows. Simon Kitchen, economist with investment bank EFG-Hermes, agreed that it would have been "very surprising for the CBE to change interest rates. "Inflation decelerated in February, and core inflation is within the CBE's comfort zone of 6 to 8 percent. Growth is still well below the levels we saw in 2006 to 2008, so although it has recovered, it is not high. Kitchen continued, "We don't see a demand side effect on inflation. There was a point at the end of last year when inflation was rising, but it has begun to decelerate again. He acknowledged that although recovery continues at a snail's pace in the US and Europe, many emerging markets have seen sufficient growth to once again raise rates. The US Federal Reserve announced on Tuesday that interest rates will remain at near zero lending for "an extended period. Hopes abound that another six months at the low rate will spur economic growth to the extent of again raising rates. According to Kitchen, the EU Central Bank looks to do the same. In China, inflationary pressures are dogging high growth, as a national survey conducted by the central bank revealed that 51 percent of Chinese residents now regard prices of consumer goods as unacceptably high, according to a statement on the website of the People s Bank of China. The People's Bank stated that, "expectations of inflation would continue to rise next quarter, and probably restrain home consumption. The World Bank has urged China to raise its interest rate to "prevent overheating as economic growth forecasts near 10 percent. The International Monetary Fund (IMF) has issued similar warnings for Egypt. The IMF said in a February report, "Egypt should be prepared to raise interest rates if inflation does not abate.Persistently high headline inflation risks generating inflationary momentum through its effect on expectations.
