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Egypt Monetary Policy March 2018

Egypt: Central Bank continues to ease stance in March

At its 29 March monetary policy meeting, the Central Bank of Egypt (CBE) slashed all its key interest rates by 100 basis points. The overnight deposit rate was cut to 16.75%, the overnight lending rate to 17.75% and the main operation rate to 17.25%. All decisions were in line with market expectations.

The move to loosen monetary policy came after price pressures ebbed further in February, with both headline and core inflation dropping to over one-year lows, as the impact of subsidy cuts, tax hikes and the depreciation of the pound continued to diminish. Headline inflation now lies within the Central Bank’s target range for Q4 2018 of 10.0%–16.0%. By easing its stance, the CBE hopes to boost lending and thus aid investment and consumption, as both firms and consumers are currently hampered by high borrowing costs. However, nominal interest rates remain elevated by historical standards, to ensure inflation continues its downward trajectory.

The communiqué contained little forward guidance, although the Bank judged inflation would be between 10.0%–16.0% in Q4 2018 and drop to single digits thereafter. FocusEconomics panelists largely concur and expect inflation to be comfortably within the band by the end of 2018. However, they continue to expect it will take longer to reduce inflation to single-digit figures, as the country’s history of high inflation has generated elevated inflation expectations, which will continue to influence price-setting behavior. As inflation continues to dim, the Central Bank is likely to cut rates further this year to boost the economy. However, it will remain wary of the impact of potential subsidy reforms later in 2018, which could temporarily push up price pressures.

The next monetary policy meeting will be held on 17 May.

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