IMF seen signaling preference for higher Egypt borrowing costs

Interest rates and fiscal measures are among the tools Egypt could use to control one of the highest inflation rates among emerging markets, a senior International Monetary Fund official said, creating speculation the Washington-based lender is recommending higher borrowing costs. “Available monetary and fiscal policy instruments, including interest rates, can help to contain inflation,” Jihad Azour, director of the fund’s Middle East and Central Asia department, said in an email. At a news conference Friday, he said interest rates are “the right instrument” to manage Egypt’s inflation. “This is something that we are discussing with the authorities,” he said.

The comments come at a time when Egyptian officials and economists point to a slowing pace of price increases as a sign that inflation may be peaking. Capital Economics, a London-based consultancy, said April 10 that “the central bank is unlikely to tighten monetary policy further.”

Consumer price inflation surged to more than 30 percent after Egypt floated the pound and reduced fuel subsidies in November, steps that helped the country secure a $12 billion, three-year IMF loan program to ease a dollar shortage that had crippled business activity. On the same day it removed currency controls, the central bank raised interest rates by 300 basis points to 14.75 percent. The Monetary Policy Committee is scheduled to meet next on May 18.

“The messages coming out of the IMF allude to a recommendation of an interest rate hike to curb inflation,” said Reham al-Desoki, senior economist at Dubai-based investment bank Arqaam Capital. “We do not, however, believe that such a move would reduce inflation in Egypt” because the surge was caused by price shocks and “base effects” relating to the level of inflation a year ago, she said.