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PREVIEW-Egypt c.bank seen holding rates for now, cut in Feb

Wed, Dec 24 2008, 14:00 GMT
http://www.afxnews.com

By Alastair Sharp

CAIRO, Dec 24 (Reuters) - The Egyptian central bank is expected to keep key interest rates on hold this week as it awaits further evidence that inflationary pressures are easing, economists and analysts said on Wednesday.

Market participants had for weeks been pricing in a cut of between 25 and 50 basis points and a minority still hold that view, but recent comments by the central bank governor convinced many that rates will remain unchanged at least until the next policy meeting in February.

On Sunday Central Bank Governor Farouk el-Okdah said the bank would only ease monetary policy at "the right time, when we can control inflation".

His comments were seen as emphasising the bank's main aim, price stability, over the government's goal of pushing growth.

"They (the central bank) are affirming central bank independence and are not going to follow suit in terms of going along with the government in its attempt to mitigate the effect of the global economic slowdown," said Reham el-Desoki, an economist at Cairo-based Beltone Financial.

"They have their own agenda, which is price stability," she added.

Urban consumer prices, the inflation figure the bank says it most closely watches, dipped to 20.3 percent in the year to November from a peak of 23.6 percent in August as global food and commodity prices retreated.

The bank's Monetary Policy Committee (MPC) had been raising rates until September, when the international financial crisis intensified. It left rates unchanged in November, when expectations of a cut were already high.

The overnight deposit rate stands at 11.5 percent and the overnight lending rate is 13.5 percent.

DATA IMPORTANT

Analysts said a cut is on the cards, but the timing will depend on the detailed inflation data known to the MPC.

"If they find that the economic growth rate has fallen below what they are predicting, they will cut the rate. If it didn't fall by a big amount they will wait until February," said Malak Reda, senior analyst at the Egyptian Centre for Economic Studies.

Reda said external factors also weigh on the MPC's decision.

"The global slowdown, the cuts in interest rates internationally, the volatility of the foreign exchange rate, are all factors that ... make it a challenging time," she said.

Further complicating the bank's dilemma is the inefficiency of monetary policy in a country lacking an established credit culture.

"If you want to have an impact you have to do it aggressively, at least 50 basis points," said Mohamed Abu Basha, an economist at EFG-Hermes. "The interest rate as a monetary policy is weak, and there is a lot of liquidity in the market."

Any cut, whether this week or early in 2009, is seen as the start of a process that will cut 300 basis points from the benchmark rates by the end of 2009, as the central bank encounters an increasingly recessionary global environment. Keywords: EGYPT RATES/

(alastair.sharp@reuters.com; editing by Tony Austin; Cairo newsroom +20 2 2578 3290)

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