Egypt Walks a Fine Line With Interest Rate Strategy

In January, the cash-strapped Arab state surprised the market with interest-rate cuts aimed at stimulating the troubled economy. At its latest monetary policy meeting the central bank again caused surprise, but this time it was by keeping rates steady.

Analysts had expected a different decision. In a note published ahead of the central bank meeting last week Emirates NBD, Dubai’s biggest bank, noted that Egypt’s core consumer price index had dropped to nearly a two-year low in January and suggested the bank could loosen policy by up to another 50 basis points. Combined with January’s reduction that would have fully reversed the 100-basis-points increase last July.

That hike in 2014 was intended to keep inflation in check following the launch of a tough subsidy reduction program as part of economic reforms that the International Monetary Fund approved.

Given the government’s focus appears to be firmly on boosting growth in a country still recovering from years of political unrest, another rate cut was quite likely, analysts said.

Efforts to grow the economy are paying off. The International Monetary Fund in February said that the recently enacted economic measures–including cuts to fuel subsidies and attempts to fix persistent government budget deficits–have boosted the prospects for growth, which is expected to accelerate steadily to 5% annually in the medium term, also helping reduce the country’s double-digit unemployment rate.

And that is one of Egypt’s biggest problems. It needs to accelerate growth to create more jobs, but can’t ignore inflation as that might infuriate the very same people.

The central bank left the overnight deposit rate, overnight lending rate, and the rate of its main operation unchanged at 8.75%, 9.75%, and 9.25%, respectively. The discount rate was also kept unchanged at 9.25%.

In a statement after the monetary policy meeting, the central bank said the current rate was appropriate “given the balance of risks surrounding the inflation and GDP outlooks.”

It did add, however, that it would “not hesitate to adjust the key CBE rates to ensure price stability over the medium-term.”

As the country prepares to host a major economic development conference in the resort town of Sharm el Sheikh in mid-March, where it’s hoping to attract billions of dollars in investments, the spotlight remains firmly on growth. But inflation clearly remains a key concern for Egypt’s policymakers.

Write to Nikhil Lohade at Nikhil.Lohade@wsj.com.