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central bankCAIRO: Egypt's central bank kept its benchmark overnight deposit and lending rates unchanged on Thursday, as expected, saying it was still concerned that inflation might speed up and economic growth slow down.

The bank's Monetary Policy Committee (MPC) left its key lending rate at 10.25 percent and the deposit rate at 9.25 percent after its regular meeting, it said on its website. All 10 economists in a Reuters survey had forecast the committee would hold the overnight rates unchanged.

"It is important to underscore that if the latest pick up in international food prices prove to be persistent this would pose an upside risk to the inflation outlook," the MPC said in a statement accompanying the decision.

Egypt's urban consumer inflation eased to 6.4 percent in July, its lowest in six years, driven by a smaller increase in food prices. Core inflation, which strips out more volatile items and is used by the central bank to help set interest rate policy, slowed to 6.34 percent from 7.04 percent in June.

The MPC repeated concerns mentioned at its last meeting that Egypt's political transformation, weak investment and the challenges facing the euro zone could slow economic growth.

Egypt's finance ministry estimates the economy grew by only 2 percent in the year to end-June as it struggled to recover from the turmoil of a popular uprising. It projects growth of 4 to 4.5 percent in 2012/13.

State finances are under strain, partly because of weak growth and higher social spending since the uprising. Egypt has requested a $4.8 billion loan from the International Monetary Fund (IMF) and hopes for a deal by the end of this year.

William Jackson, an analyst with Capital Economics, said decreasing external financing risks and the economy's need for a stimulus meant the central bank might be tempted to start an easing cycle if an IMF deal were signed.

"Given the recent economic data, coupled with signs that a much-awaited deal with the IMF could be signed soon, rate cuts may come onto the agenda over the coming few months," he wrote in a note commenting on Thursday's rates decision.

Two measures the government may have to take to get the loan are reducing energy subsidies and allowing the Egyptian pound to depreciate, both of which would feed higher prices. The currency hit its weakest level in more than seven and a half years, of above 6 to the US dollar, earlier this week. The bank also left the discount rate unchanged at 9.5 percent and the seven-day repurchase agreement (repo) rate at 9.75 percent.

Copyright Reuters, 2012

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