Egypt rates seen on hold before crucial vote

CAIRO (Reuters) - Egypt's central bank is expected to keep its key interest rates on hold at a monetary policy meeting later on Thursday as it opts for stability and continuity ahead of a highly charged presidential vote on Saturday and Sunday, economists said.

All nine economists in a Reuters survey forecast that Thursday's meeting would conclude with overnight rates unchanged at 9.75 percent for lending and 8.25 percent for deposits.

"The risk of a currency crisis is still high, especially given rising political tensions. Therefore, we don't think that the CBE will cut rates just yet," said Said Hirsh of Capital Economics.

Egypt's central bank has kept its benchmark overnight deposit and lending rates steady since November, when it unexpectedly raised rates for the first time in more than two years.

At its last meeting on May 3 it warned that although economic growth was feeble, there was a risk that inflation might accelerate.

Since then, urban consumer price inflation, the most closely watched indicator of prices, has eased, declining to 8.3 percent year-on-year in May from 8.8 percent in April.

Core annual inflation, which strips out subsidised goods and volatile items including fruit and vegetables, slowed to 7.2 percent in the year to May from 8.4 percent in April.

The economy grew by an annualised 5.2 percent in the first quarter of 2012, but this was after a 4.3 percent contraction in the first quarter of 2011, a result of the uprising that ousted Hosni Mubarak from the presidency.

Egypt's economy is still struggling, any policy response is hindered by political infighting and most financial aid promised by foreign donors is yet to arrive.

Base rate hikes and a lowered bank reserve requirement have helped draw sorely needed funds into local banks as they shoulder the burden of financing a state deficit pushed wider by last year's uprising.

Foreign investors have slashed their exposure to Egyptian state debt and treasury bill yields rose to historic highs at the latest auctions.

"Although growth is weak and inflation has eased, the outlook is still too uncertain to allow CBE to cut," said Simon Williams, an economist with HSBC.

The economy grew by only 0.3 percent in the last six months of 2011, according to central bank figures, but is thought by some analysts to have contracted last year for the first time since the 1960s amid the turmoil of its February uprising.

(Editing by Tom Pfeiffer, Adrian Croft)