Egypt: Central Bank hikes policy rates amid high inflation
December 24, 2015
At its 24 December monetary policy meeting, which had originally been scheduled for 17 December, the Central Bank of Egypt (CBE) decided to hike the overnight deposit rate to 9.25% from 8.75%, marking the first increase in over a year. The CBE also increased the overnight lending rate and the rate of the CBE's main operation by 50 basis points each. Concerns over strong inflationary pressures were cited as the driving factor behind the CBE’s decision; however, a general capital flight out of emerging economies likely also influenced the Bank’s decision.
The bank had postponed its rate hike decision from 17 December to allow more time to collaborate with the government on measures to mitigate inflationary pressures and discuss fiscal consolidation measures. Inflation has been obstinately high in Egypt, thanks to increased non-food prices; however, it is not the only area of concern for the Egyptian economy. High government debt levels, current account imbalances and the need for structural reforms have forced the CBE to coordinate with the government and draw up a plan that address such issues.
The across-the-board rate hike will act on inflation; however, it will likely stem the dwindling of foreign exchange reserves. Egypt has expended sizable funds in an effort to defend the pound’s peg, with much of these funds coming from Arab development loans. Adding to this already tenuous situation is the policy action in the U.S. The Fed’s tightening cycle is causing a dollar crunch in many emerging economies, including Egypt. Prior to the decision, market analysts were split regarding the CBE’s course of action, with some expecting a rate hike to slow capital outflows and combat inflation, while others felt that the bank would keep rates low in order to spur investment and growth. Despite the policy tightening, the Bank noted that large scale investment in domestic mega projects will bolster growth looking ahead.
In summary, the Bank stated that “given the balance of risks surrounding the inflation and GDP outlooks, the MPC judges that a rate hike is warranted to address inflationary pressures and anchor inflation expectations.” Looking ahead, the challenge for the bank will not only be moderating inflation, but also cooperating with the government in order in improve public finances.
Author: Carl Kelly, Economist