In an attempt to head off a spike in energy prices and rising consumer prices, Egypt’s central bank unexpectedly hiked interest rates, putting pressure on growth and the country-related exchange traded fund.
The Market Vectors Egypt Index ETF (NYSEArca: EGPT) dipped 0.2% Thursday. EGPT has surged 28.4% year-to-date.
The Monetary Policy Committee raised its benchmark overnight deposit rate by one percentage point to 9.25% and the overnight lending rate was increased by one percentage point to 10.25% while most economists expected rates to remain unchanged, reports Mariam Fam for Bloomberg.
The move is a reversal from the central bank’s previous three rate cuts over the past year, with the most recent in December when rates were lowered to a two-year low of 8.25%.
The Egyptian government has been providing fuel subsidies to artificially lower the price of oil. However, President Abdel-Fattah El-Sisi raised fuel prices as a way to reduce the government’s budget deficit. Additionally, the government raised taxes on cigarettes and alcohol. Government subsidies make up about 30% of the budget, which has ballooned to over 10% of GDP in the fiscal year that began this month.
While steps to lower the deficit will improve “fiscal sustainability over the medium-term, a relative price increase is inevitable,” central bank sub-governor Rania Al-Mashat said. “The MPC judges that a preemptive rate hike is warranted to anchor inflation expectations and hence limit a generalized price increase, which is detrimental to the economy over the medium-term.”