Egypt: CBE hikes rates in May in a bid to tame inflation
May 21, 2017
At the 21 May monetary policy meeting, the Central Bank of Egypt (CBE) significantly increased interest rates across the board, in an attempt to keep a lid on prices, which have soared since the pound was floated last November. The overnight deposit rate rose from 14.75% to 16.75%, the overnight lending rate increased from 15.75% to 17.75% and the main operation rate jumped from 15.25% to 17.25%. The decision took markets, who were expecting the CBE to stay put for the fifth consecutive meeting, completely by surprise.
The Bank’s bold move comes as month-on-month price increases are moderating following a peak reached in January, with April marking the third consecutive fall, which is a sign that the effects of the huge depreciation of the pound late last year are gradually receding. However, despite the fading of cost-push pressures, demand-pull inflationary pressures are heating up, with recently released figures showing that GDP rose 3.9% year-on-year in the first quarter of 2017, up from 3.8% in Q4 of calendar year 2016. Other indicators paint a similar picture; the PMI has risen steadily in recent months, indicating that Egyptian firms are gradually picking themselves up, while unemployment dipped in the January-March period. The Central Bank therefore decided to hike rates in order to ward off the potential impact of stronger domestic demand on prices and to anchor inflation expectations, even at the risk of dampening the nascent economic recovery.
In its communique, the CBE announced greater transparency regarding inflation targeting going forward. The Bank set out its aim of reducing headline inflation to 10.0%-16.0% by Q4 2018 and to single digits thereafter, with elevated headline inflation being tolerated in the short-term due to the magnitude of the supply-side shock the economy is currently undergoing. The Bank didn’t provide forward guidance, although following such a significant tightening of monetary policy and with the economy still in a fragile state, rates are unlikely to move much higher in the near term. In the medium term, with the Bank’s monetary stance feeding through to lower prices, there should be some room for a slight rate reduction.
The next monetary policy meeting will be held on 6 July.
Author: Oliver Reynolds, Economist