(Adds quotes from Lagarde, interest rates hike)
CAIRO, July 14 (Reuters) - The International Monetary Fund said on Friday it had approved a second loan installment worth $1.25 billion for Egypt.
Egypt agreed to a three-year, $12 billion IMF loan programme in November that is tied to ambitious economic reforms such as subsidy cuts and tax hikes.
"The government and the central bank have taken the right measures to rein in inflation, reduce the budget deficit, and set the Egyptian economy on a path to stability and growth," Christine Lagarde, managing director of the IMF said in a statement.
Last week, the government increased electricity prices by up to 42 percent this fiscal year for households. A week earlier, it raised fuel prices by up to 50 percent to help meet the terms of its IMF loan agreement.
Egypt's central bank, faced with accelerating inflation, raised its key interest rates by 200 basis points for the second policy meeting in a row, surprising economists who had forecast no change.
The bank raised interest rates by three percentage points after the currency flotation. The IMF has said lowering inflation is crucial to keeping the reform programme on track and that raising interest rates could be an appropriate tool for doing so.
Egypt floated its currency in November, and since then its pound has roughly halved in value. As the currency's value dropped, inflation surged.
Core inflation, which strips out volatile items like food reached 31.95 percent year on year in June.
Egyptian President Abdel Fattah al-Sisi is under pressure to balance IMF-austerity reforms to fix Egypt's economy while limiting the financial impact on poorer Egyptians who are key to re-electing him for a second term in next year's presidential election.
Sisi last month announced a raft of new spending, including more than doubling monthly food subsidies effective starting July 1, a freeze to taxes on agricultural lands, and an increase of 15 percent in civil servant pensions.
The lion's share of the social spending allocation will be channeled into monthly food subsidies, which will increase to 50 pounds per person from 21 currently, a hike that will cost the state an additional 38 billion Egyptian pounds ($2.12 billion) in the current fiscal year's budget, which began in July.
"I am very pleased that the government has taken and will continue to take measures to protect the poor and vulnerable groups, including through increasing social spending," Lagarde added. ($1 = 17.9300 Egyptian pounds)
Reporting by Amina Ismail; Editing by Andrew Hay and Lisa Shumaker