CAIRO: Egypt's central bank faces a tough choice when it meets on Thursday: clamp down on inflation or support an economy lurching towards recession, a dilemma that makes its rate decision too close to call.
More than two years of political and economic turmoil since the overthrow of President Hosni Mubarak has hammered foreign investment and led to budget and currency crises, which have helped drive urban inflation above 8 percent.
Some economists expect the acceleration in price prices will prompt the central bank to raise interest rates this week, changing monetary policy for the first time in more than a year.
"Two months ago inflation was around 4.7 percent and then in February it jumped Banks have already increased the rates on deposits over the past month and a half," EFG-Hermes economist Mohamed Abu Basha said.
He expects the bank to increase official rates by 50 basis points at its meeting on Thursday, which will be Hisham Ramez's first since taking over as governor in January.
The Egyptian pound has lost more than 8 percent of its value against the dollar since late last year, pushing up the cost of imported goods, and inflation in towns and cities jumped to 8.2 percent in the year to February from 6.3 percent in January.
But with the economy barely growing, and at a rate far below the level needed to create enough jobs for a rapidly expanding population, other analysts say raising rates now would be rash.
President Mohamed Mursi's government has just resumed talks on a $4.8 billion loan from the International Monetary Fund, which is demanding reforms to rein in Egypt's budget deficit. Budget goals will be harder to meet if the economy doesn't pick up.
"We think rates will be left on hold on Thursday. The central bank is walking on a tightrope, it needs to attract capital inflows to Egypt, but the economy is so weak that raising interest rates would be very harmful," said William Jackson, emerging markets economist at Capital Economics.
The government forecasts the budget deficit for the year to June will swell to 189.7 billion Egyptian pounds ($28 billion), or 10.9 percent of gross domestic product, from 166.7 billion a year earlier.
That assumes urgent economic reforms are made. Without them, the deficit is forecast to hit 12.3 percent of GDP.
Egypt's central bank last changed monetary policy in November 2011 when it raised its overnight deposit rate by 100 basis points to 9.25 percent and its overnight lending rate by 50 basis points to 10.25 percent.
It also lifted the discount rate by 100 basis points to 9.5 percent.
Hany Genena, head of research at Pharos Securities Brokerage, said new governor Ramez will want to defend the pound from further downward pressure but will not want to jeopardise IMF talks, which means rates are likely to stay pat for now.
"An aggressive interest rate defense will only be launched if the central bank sees that IMF negotiations are moving smoothly and that any ensuing recession will be shortlived," said Genena.
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