The Central Bank of Egypt (CBE) has increased key interest rates in a bid to stimulate growth and curb rising inflation.

The central bank increased both rates by approximately 200 basis points following a Monetary Policy committee (MPC) meeting on 22 May.

The central bank raised the overnight deposit rate to 16.75 per cent from 14.75 per cent, and the overnight lending rate to 17.75 from 15.75 per cent.

This is the first increase in rates since the central bank aggressively hiked them by 300 points in early November, following the flotation the Egyptian pound.

The central bank has kept its key interest rates unchanged for four consecutive meetings since November’s massive hike.

Local banking sources have told MEED that the central bank increased interest rates following mounting pressure from the IMF to curb rising inflation rates, which reached highs of 32 per cent in March this year.

The idea is that high interest rates will allow for economic growth. But a number of analysts have told MEED that in the case of Egypt, higher interest rates do little to appease Egypt’s problem of “supply shocks rather than demand-driven inflation,” as finance minister, Amr al-Garhy, put in in an interview on local television earlier this month.

Higher interest rates can help in raising inflows into treasury bills and investment portfolios. They can also help compensating creditors for inflation.

The problem is inflation in Egypt has little to do with liquidity in people’s hands, it is caused by a surge in production costs following the currency devaluation, the lifting of key subsidies, the introduction of a value added tax and a hike in custom fees. Raising interest rates in this case does little to curb supply inflation, which is the case for Egypt.

In another attempt to stimulate growth, the cabinet recently raised the limit of the maximum amount of dollar bonds the country can issue on international markets by $2bn. The ceiling of international dollar issuances to fixed income investors is currently capped at $5bn and has been raised to $7bn, indicating Cairo could return to the international debt market again this year.