May 22, 2017 / 12:15 PM / 3 months ago

Egypt's interest rate hike to curb growth but not inflation, critics say

CAIRO, May 22 (Reuters) - Egypt's financial community says Sunday's two-percent interest rate hike, in line with calls from the International Monetary Fund (IMF), will do little to curb rampant inflation and will harm investment at a time when the country needs it most.

The central bank's first hike since a 3-percent rate rise in November is aimed at dealing with inflation - now above 30 percent - as well as demand-side pressures, after the IMF said action on those two factors was vital to keeping Egypt's economic reform programme on track.

But economists, businessmen and bankers say that inflation in Egypt, where only 10 percent of the population have bank accounts, is due to rising raw materials costs and a hike in rates will not produce the desired effect.

The business community blames IMF pressure for what it says is a wrong decision and says that Egypt's specific business and monetary environment has not been taken into account and requires a different approach.

"It is clear that the IMF is going by the book while Egypt is different to other countries...so what works elsewhere does not necessarily work here. There are different dynamics, such as that less than 10 percent of the population is banked," a Cairo-based banker, who declined to be named, said.

Thirteen of 14 respondents polled by Reuters had expected the central bank to keep interest rates on hold.

"We don't understand the logic of this decision," Prime Holding economist, Eman Negm, said, noting that the rate hike may have the opposite effect of worsening inflation levels by raising borrowing costs for companies.

"The central bank said they are targeting inflation but that is wrong because inflation here is cost-push inflation. They are clearly influenced by the IMF pressures," she said.

Egypt, which has been struggling to revive growth since an uprising six years ago, floated its currency, as well as raising rates, in November. The pound has halved in value since then.

Those moves helped it clinch a 3-year $12 billion IMF loan programme tied to ambitious reforms such as tax hikes and subsidy cuts which saw inflation jump to a three-decade high at 31.5 percent in April.

"I don't understand how they can take such a step, how do they comply with all the IMF's demands? The economy can halt," Cairo Chamber of Commerce board member Alaa El-Saba said, referrring to Sunday's rate hike.

"Borrowing now will cost me (interest of) more than 18 percent. This is a ridiculous figure which will be added to the price of goods," he said.

Egypt's stock market fell 2.5 percent by 11:55 GMT. (Additional reporting by Ehab Farouk; Editing by Louise Ireland)

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