Egypt: Central Bank loosens stance in February
February 15, 2018
At its 15 February 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 17.75%, the overnight lending rate to 18.75% and the main operation rate to 18.25%. All decisions were in line with market expectations.
The move to loosen monetary policy came after price pressures continued to ease in January, with lower prices for food and non-alcoholic beverages more than offsetting higher regulated prices. Headline and core inflation now stand at over one-year lows, with headline inflation only slightly above the Central Bank’s 10.0%–16.0% target for Q4 2018. The sharp fall in inflation offered the Bank breathing room to lower rates to reduce firms’ borrowing costs and support investment. However, interest rates remain high by recent historical standards, to ensure inflation continues to trend downwards towards the target.
The communiqué contained little forward guidance, although the Bank judged it was still on track to bring inflation to 10.0%–16.0% by Q4 of FY 2018 and 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 figures, as the country’s history of high inflation has generated elevated inflation expectations, which will continue to influence price-setting behavior. With inflation set to fall going forward as the impact of the government’s reform measures decreases, the Central Bank is likely to continue reducing rates this year to support the real economy.
The next monetary policy meeting will be held on 29 March.
Author: Oliver Reynolds, Economist