Egypt: Central Bank holds rates firm in August
August 17, 2017
At its 17 August monetary policy meeting, the Central Bank of Egypt (CBE) decided to keep interest rates steady following two rounds of aggressive rate hikes, which took place in May and July, implemented in an attempt to halt painfully-high inflation. The overnight deposit rate was held at 18.75%, the overnight lending rate at 19.75% and the main operation rate at 19.25%. All decisions were in line with market expectations.
The Bank’s move follows the implementation of economic reforms recommended by the IMF in order to stabilize prices and as part of the program to receive a $12 billion loan. Although inflation continued to rise following the rate hike in July, there seems to be a light at the end of the tunnel. The Bank expressed that incoming economic data has been in line with expectations, and inflation is on track to match the CBE’s target of 10%–16% by Q4 2018 then to further decline in 2019. Inflationary pressures should be dampened by a tight monetary stance and the fading-out of secondary effects from subsidy cuts, higher fuel prices and the increased VAT. The Bank also mentioned that economic growth picked up in Q2 as GDP expanded 4.9% over the same quarter last year, underpinned by a stronger external sector and investment growth. However, the resulting demand pressures weren’t enough to encourage the Bank to tighten its stance further.
In its communiqué, the CBE reiterated that it would withstand the short-term high inflation resulting from first-round effects of economic reform measures, and it restated its main aim of significantly reducing inflation by the end of 2018. FocusEconomics panelists agree that the Bank is likely to meet its objective, despite structural reforms which will put upward pressure on inflation in the short-term. Contrasting its rhetoric last month which suggested a future loosening of monetary policy, the Bank noted that materialization of inflationary pressures could result in a “stronger than projected loosening or tightening”.
The next monetary policy meeting will be held on 28 September.
Author: Lindsey Ice, Economist