Why did Egypt’s Central Bank keep interest rates unchanged?
Central Bank of Egypt -YOUM7 (Archive)
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CAIRO: The Central Bank of Egypt (CBE) announced Thursday it had decided to keep its interest rates unchanged because they are “currently appropriate given the balance of risks surrounding the inflation and GDP outlooks.”

In a late Thursday meeting, the CBE’s Monetary Policy Committee (MPC,) kept the overnight deposit and lending rates “unchanged” at levels decided in February at 8.75 percent and 9.75 percent respectively. CBE’s main operation and the discount rate were also kept at 9.25 percent each.

The bank added in a statement posted on its website that it will closely monitor all economic developments and adjust key CBE rates to ensure price stability over the medium-term.

Inflation surged over tobacco, butane cylinders prices

“Headline CPI increased by 1.55 percent (m/m) in March, compared to an increase of 1.86 percent (m/m) in February, while the annual rate increased to 11.51 percent in March from 10.56 percent in February, supported by the favorable base effect from last year,” said the CBE.

It cited the bulk of monthly developments to upward adjustments in administered prices, especially tobacco, in addition to supply bottlenecks related to the distribution of butane cylinders, coupled with price hikes of volatile food items.

Meanwhile, the CBE predicted that lower oil prices and the consequent revision in international food price forecasts, would largely mitigate the domestic inflation outlook.

A call for reviewing monetary policies to match government plans

“Egypt’s central bank is adopting an expansionary monetary policy based on holding key benchmark rates at low levels with the aim of fostering borrowing and investment,” Mohsen Adel, deputy head of the EG-Finance Association, told The Cairo Post.

At the same time, the government has followed a balanced policy to ration its spending through recent decisions to slash fuel and energy subsidies, in order to control its budget deficit along with reducing domestic and external debts, Adel added.

“Such procedures should have pushed monetary policy makers and local banks to reconsider its decision in light of the state new directions, especially the possible hike in inflation and CPI driven by fuel price hikes,” he added.

Restructuring subsidies and amending taxation is not necessarily associated with a deflationary economic policy, said Adel. He urged the government take steps to promote investment, and said that the GDP would increase Egypt’s national income and then absorb the effects of removing subsidies on strategic commodities.

Real GDP grew 4.3% in H1 backed by manufacturing, tourism

At the same time, the central bank said Egypt’s real  GDP growth hit 4.3 percent (y/y) in 2014/15 Q2, recording 5.6 percent (y/y) in the first half of the fiscal year, powered by the 6.8 percent record growth witnessed in Q1, the highest annual growth rate since 2007/08 Q4.

In 2013/14 FY real GDP growth recorded 2.2 percent.

The bank cited the expansion in economic activity during 2014/2015 Q2 to the manufacturing sector’s ongoing growth, along with the expansion of tourism activities for the second straight quarter after several quarters of contraction.

Also, investment continued to improve for the 4th consecutive quarter, regardless the widening trade deficit which is stalling real GDP growth, said the CBE, adding that investments in domestic mega projects such as the Suez Canal are to boost economic growth.

However, downside risks that surround the global recovery on the back of challenges facing the Euro Area and the softening growth in emerging markets could pose downside risks to domestic GDP, the CBE stated.

Key policy rates saw the last change in January, when the MPC slashed them by 50 basis points each, on speculation of lower inflation. This was the first action since they were raised by 100 basis points each last July, in an attempt to control soaring inflation after the government cut fuel subsidies by up to 78 percent.

Raising corridor rates would not help control inflation now

Adel ruled out that any decision to raise corridor rates would help reduce the money supply or withdraw the greatest liquidity from clients to control inflation.

“It would not help increase deposits at the moment, due to the thin liquidity available in the market since clients have tended to withdraw from their savings to cover increasing costs,” he added.

In 2005, the CBE introduced an interest rate corridor and two standing facilities: the overnight lending and the overnight deposit facility. The interest rates on the two standing facilities define the ceiling and floor of the corridor, respectively.

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