Egypt: CBE stays put for fourth consecutive meeting as inflationary pressures start to fade
March 30, 2017
At the 30 March monetary policy meeting, the Central Bank of Egypt (CBE) held fire and left all main interest rates unchanged for the fourth consecutive meeting as authorities continue to expect the current jump in inflation to be short-lived. As a result, the overnight deposit rate currently sits at 14.75%, the overnight lending rate at 15.75% and the main operation rate at 15.25%, where they have been since November 2016.
The effects of the floating of the Egyptian pound, coupled with the removal of multiple subsidies and the introduction of a value-added tax, continued to filter through in February, with inflation reaching a three-decade high of 30.2%. In a preemptive move in November, the Central Bank had already increased interest rates by 300 basis points, expecting the pound to weaken markedly after being floated. As such, officials have not felt the pressure to further increase rates, arguing that, in addition to the measures already taken in November, the transitory nature of many cost-push effects on prices will cause inflation to moderate in upcoming months. Indeed, monthly changes in consumer prices seem to have already peaked, with February’s change in prices decelerating from that seen in January.
The statement was devoid of strong forward guidance. The weakness of the Egyptian economy and a sizeable interest burden on the government suggest that, under the premise that inflation peaks this year, the Central Bank could lower rates slightly. A high interest burden is weighing particularly on the government’s plan to rein in its fiscal deficit. Conversely, if inflationary pressures persist beyond expectations, a further tightening might be in the cards. On inflation, however, officials comment:
“Annual inflation is expected to drop after transitory cost-push effects diminish and monthly inflation rates moderate, supported by the previous preemptive policy rate hikes, longer-term absorption of excess liquidity, as well as by favorable base effects.”
Author: David Ampudia, Economist