Egypt: CBE continues to aggressively hike rates in July
July 6, 2017
At its 6 July monetary policy meeting, the Central Bank of Egypt (CBE) significantly increased interest rates across the board for the second consecutive meeting, in an attempt to keep a lid on prices which have soared since the pound was floated last November. The overnight deposit rate was hiked from 16.75% to 18.75%, the overnight lending rate was increased from 17.75% to 19.75% and the main operation rate jumped from 17.25% to 19.25%. The move was consistent with recent comments by the IMF, which advised the country to make tackling inflation its top priority.
The Bank’s move comes as headline inflation remains painfully high, despite dipping slightly in May for the first time since October. Although underlying inflationary pressures have eased in recent months as the effects of the currency depreciation and recent subsidy cuts work their way out of the system, they are still too high for the Bank’s liking. This is in significant part due to insufficiently well anchored inflation expectations, following several years of elevated price increases. In addition, several reforms agreed with the IMF as part of the financial assistance package come into force in July and have the potential to fan the flames of inflation further in the short term; the government recently announced a significant reduction in fuel subsidies, VAT rose to 14.0% from the first day of the month and higher electricity prices are expected within the next few weeks. On the demand side of the equation, the economy looks to be slowly on the mend, with growth in Q1 revised up to 4.3%, while industrial production has rebounded so far this year. By raising interest rates, the Central Bank aims to head off potentially higher cost-push and demand-pull price pressures in the months ahead, and set the headline inflation rate on a firm downward path.
In its communique, the CBE reiterated its aim, introduced at the previous meeting in a bid to anchor expectations, of reducing headline inflation to 10.0%-16.0% by Q4 2018 and to single digits thereafter. FocusEconomics panelists agree that the Bank is likely to meet its objective, despite structural reforms which will put upward pressure on inflation in the short term. Due to the magnitude of the supply-side shock the economy is currently undergoing, and in order to avoid stamping out an incipient economic recovery, the CBE is prepared to tolerate high inflation for an extended period of time going forward. In contrast to the previous month, the Bank gave a clear indication that it is likely to loosen monetary policy somewhat going forward as soon as underlying inflation moderates.
The next monetary policy meeting will be held on 17 August.
Author: Oliver Reynolds, Economist