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Egypt's central bank raised its key policy rates by another 200 basis points due to a worsening of the outlook for inflation but held out the prospect of lower rates by saying it expects "a measured easing of the monetary stance" as soon as underlying inflation starts to moderate.

    

The Central Bank of Egypt (CBE) has now raised its benchmark overnight deposit rate by 1,000 basis points to 18.75 percent since starting a tightening cycle in December 2015 and by 400 basis points this year following a similar-sized hike in May.

      

The central bank's monetary policy committee underscored that tighter monetary policy stance is not aimed at offsetting first-round effects on inflation from an increase in prices from the government's wide-ranging economic reform from November last year but rather to contain second-round effects and ensure that it achieves its goal of pushing down inflation.

"Consequently, the MPC decided that tightening monetary conditions is warranted to achieve the inflation target of 13 percent (+/- 3 percent) in 2018 Q4 and single digits thereafter," the CBE said.

  

Egypt's headline inflation rate declined to 29.7 percent in May from 31.5 percent in April, but this was partly due to a favorable comparison stemming from the exchange rate depreciation in March 2016, which affected prices in May last year, the CBE said.

    

While the impact of the reform measures on prices of goods and services has largely been passed through, the central bank said underlying inflation remains above its target and this is reflected in food and producer prices.

    

In addition, hydrocarbon prices rose on June 29, value-added-taxes went up on July 1 and electricity prices are scheduled to rise this month while other regulated prices could also be increased, putting further upward pressure on inflation.

    

While the CBE's overnight deposit rate was raised by 200 basis points to 18.75 percent, the overnight lending rate was raised by the same amount to 19.75 percent, the rate on the CBE's main operation was raised to 19.25 percent and the discount rate to 19.25 percent.

 

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