Egypt holds rate to limit inflation, anchor expectations

    Egypt's central bank maintained its benchmark overnight deposit rate at 9.25 percent, as expected, saying its key rates are appropriate to anchor inflation expectations "and limit a generalized price increase given the lagged transmission of the previous rate hike across the economy."
    In July the Central Bank of Egypt (CBE) surprised financial markets by raising its rate by 100 basis points in what it described as a preemptive move to anchor inflation expectations and limit a general increase in prices following the government's price increase on a range of regulated items, including fuel, electricity and tobacco, as part of its plan to cut budget deficits.
    Egypt's headline inflation rate rose to 11.04 percent in July from 8.2 percent in June, the bank said, adding the government's price increase explained the bulk of the price increase along with the seasonal effect of Ramadan. Core inflation in July rose to 9.57 percent from 8.76 percent in June.
   "While the direct first round effect of the price adjustments have led to a level shift up in the headline CPI in July 2014, higher than anticipated indirect and second round effects pose an upside risk to the inflation outlook," the CBE said.
   However, this risk is countered by an unlikely sharp rise in international food prices so upside risks from imported inflation remain contained, the central bank added.

    Egypt's economy, which has seen weak growth since a popular uprising in 2011 unseated Hosni Mubarak, improved in the first calendar quarter of 2014, or the third quarter of fiscal 2013/14.
    Gross Domestic Product expanded by an annual 2.50 percent, up from 1.44 percent in the previous quarter, helped by manufacturing and construction. But tourism and petroleum sectors still shrunk and investment levels continue to be low, the CBE said.
   "Looking ahead, while investments in domestic mega projects such as the Suez Canal are expected to contribute to economic growth, the downside risks that surround the global recovery on the back of challenges facing the Euro area and the softening growth in emerging markets could pose downside risks to domestic GDP going forward," the central bank said.
    Egypt's economy expanded by 2.1 percent in 2013, largely steady from 2012's 2.2 percent but slightly up from 2011's 1.8 percent. The International Monetary Fund (IMF) forecasts 2.3 percent growth this year and 4.1 percent in 2015.

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