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.”
Investment bank EFG-Hermes Holding SAE projects average inflation to rise to 10% in 2014 and 14% in 2015.
The rate move means the central bank is “expecting an aggressive increase in inflation to an extent that can impact growth through hurting private spending,” Mona Mansour, chief economist at Cairo Financial Holding, said in the article. “They are prioritizing fighting inflation over attracting investments.”
Market Vectors Egypt Index ETF
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Max Chen contributed to this article.