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MENAFN - Khaleej Times - 02/02/2013

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(MENAFN - Khaleej Times) Egypt's central bank kept interest rates on hold on Thursday, as political tensions and a sliding currency block an increase to prop up the pound or a cut to boost a barely growing economy.

The bank kept its overnight deposit rate at 9.25 per cent, a decision forecast by all six economists surveyed by Bloomberg, and the lending rate at 10.25 per cent. It was the first rate meeting since the bank started auctioning dollars to local lenders on December 30.

The pound has weakened more than seven per cent, the most among emerging-market currencies, since the sales began. One-year government yields are about three times Lebanon's and higher than similarly rated Pakistan.

The rate decision came after a wave of deadly clashes that erupted on the eve of the second anniversary of the uprising that ousted Hosni Mubarak, imposing a new obstacle to Egypt's efforts to revive the economy. The unrest, cited by Fitch Ratings for a downgrade of Egypt's debt on Wednesday, has left more than 50 people dead and led President Mohamed Mursi to declare a state of emergency and impose curfews in three provinces.

"Growth is too weak to hike, but political risk and the pressures on the currency are too strong to cut," Liz Martins, Dubai-based senior economist at HSBC Bank Middle East, said by e-mail. "If they do have a bias, it will be to the upside, to support the currency."

Since the start of the uprising in January 2011, the central bank has changed the key deposit rate only once, raising it by a percentage point in November of that year. While it cited inflationary pressures for the move, most economists said it was intended to prevent a run on the Egyptian pound.

Egypt paid 14 per cent on average to sell one-year treasury bills at an auction last week. That compares with the 5.35 per cent Lebanon paid this month to sell similar-maturity debt. Pakistan, which like Egypt is rated B- at Standard & Poor's, paid 9.24 per cent.

The government has sold 38 per cent of the 10.4 billion pounds (1.6 billion) it sought to raise so far this quarter at auctions of securities that mature in more than one year.

Egypt's "fiscal position has worsened" and "serious divisions have opened within society, contributing to sporadic outbursts of violence," Fitch said on Wednesday. It lowered the rating by one step to B, five below investment grade. Egypt's 5.75 per cent dollar bonds due in April 2020 extended losses on Thursday, after falling the most since Mursi's June election on Wednesday. It traded at 6.43 per cent at 6:30pm in Cairo.

Moody's Investors Service also said unrest adds credit-negative pressures on the economy and increases uncertainty about nation's ability to negotiate a support program with the International Monetary Fund.

Egypt's economy is still struggling to recover from the turmoil that followed the revolt. It has grown at about two per cent a year in the last two years, the slowest pace since the early 1990s and barely above the rate of population growth. Tourism and investment have plunged.


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