Egypt: CBE stays put for second straight month in December amid soaring inflation
December 29, 2016
The Central Bank of Egypt (CBE) held fire at its meeting on 29 December, maintaining all rates unchanged at their respective multi-year highs. The overnight deposit rate currently sits at 14.75%, the overnight lending rate at 15.75% and the main operation rate at 15.25%. In 2016 overall, the Bank hiked interest rates by a cumulative 550 basis points as the country struggled against a widening disparity between official and black market exchange rates. Previous devaluations of the pound, despite failing to yield results in terms of narrowing the margin between the two rates, had fueled higher prices for consumer goods, forcing the Bank to constantly intervene by means of increasing rates.
Regarding price developments, the CBE noted that November’s headline inflation reading was largely impacted by IMF-backed economic measures, including both the exchange rate liberalization and the scrapping of hydrocarbon subsidies. The free floating of the Egyptian pound in early November caused consumer prices to spike in the same month, which could call for further hikes if the CBE is to attempt to tame inflationary pressures. However, the Bank stated that, in anticipation of accelerating cost-push inflation, the recent hike by 300 basis points of all main interest rates on 3 November would be good enough for now, particularly once transitory pressures dissipate.
As for economic growth, the Bank stated that the country’s economy expanded an annual 4.3% in fiscal year 2015/16, which runs from July 2015 to June 2016. This was slightly below the 4.4% increase observed in the previous fiscal year. Although data for the fourth quarter is still being revised by the Ministry of Planning, Egypt’s economy is likely to have been buttressed by a resilient domestic market, with both private and government consumption more than balancing out subdued levels of investment and a lackluster external sector. The Bank also noted that the unemployment rate, albeit edging up slightly in Q3, has been on a path of decline ever since it peaked in Q4 2013. This, the Bank said, reflects gains made in Egypt’s competitiveness thanks to lower real unit labor costs.
The Central Bank reaffirmed its commitment to a price stability mandate and said that it will follow the impact of economic and monetary developments on the inflation outlook closely. The next monetary policy meeting is scheduled for 16 February.
Author: David Ampudia, Economist