CAIRO: The Central Bank of Egypt’s Monetary Policy Committee (MPC) agreed last Thursday to raise key interest rates as part of a renewed effort to address troubling inflationary concerns.
In a press release, the Central Bank of Egypt (CBE) announced the committee’s decision to raise the overnight lending rate and the deposit facility interest rate by 50 basis points to 13 percent and 11 percent, respectively, and the discount rate by 100 basis points to 11 percent.The move suggests that the CBE is taking a more aggressive stand on inflation than it had previously.
“The MPC will continue to closely monitor all economic developments, wrote Monetary Policy Unit Division Chief Rania Al-Mashat in a memo, “especially the factors underlying inflation, and will not hesitate to adjust the key CBE rates to ensure price stability over the medium-term.
The inflation rate has risen in recent months from 22.9 percent in June to a record 23.1 percent in July, fuelled by skyrocketing food prices, the CAPMAS national statistics agency reported on Sunday.
The dramatic rise in the national consumer price index – the highest jump in 16 years – was mainly due to an increase of 32.5 percent year-on-year in food prices, CAPMAS said.
Year-on-year inflation in urban areas was 22 percent for July and 24.3 percent in rural areas.
The MPC has already struggled to tackle inflationary pressures in 2008, having raised interest rates four times by a total of 175 basis points.
Reham ElDesoki, senior economist at Beltone Financial, noted that despite a continued rise in inflation, the 2008 rate hikes may have not yet taken full effect.
“Weaknesses in the monetary policy transmission mechanism, she wrote in a memo, “result in a lag period between rate hikes and a rise in the general interest rate level, possibly leading to the previous four hikes continuing to have an effect later on, as banks continue to raise their rates.
Analyzing the rate hikes, ElDesoki posited that the MPC’s actions would be driven by inflationary figures not yet available to the public.
Another central concern for the MPC in its decision to boost key rates was the continuing instability of food prices, especially with the consumer-heavy month of Ramadan approaching.
“The headline CPI inflation showed a modest acceleration in June, noted Al-Mashat, “reaching 20.2 percent as domestic food inflation was broadly unchanged. However, the MPC remains concerned about possible propagation of food inflation to non-food inflation.
The monthly inflation rate for food prices rose from 0.8 percent to 3.2 percent between June and July.
“We believe, noted ElDesoki, “that this jump in prices on a monthly basis and, more importantly, the downward price rigidities, lead up to Ramadan and second round effects of the energy price hike in May constitute the main reasons behind the interest rate hike by the MPC last Thursday.
Interest rate increases have not been the only tactic employed by the CBE to reign in inflation. The bank has also notably stepped up its deposit auctions in an effort to pull capital out of the market.
The MPC is expected to meet three more times this year, in September, November and December. At those meetings, it is more likely that the ambitious 2008 rate hikes will have begun to have an effect on inflation.
This should allow the committee to better assess the impact and effectiveness of rate hikes on the broader Egyptian economy. -Additional reporting by AFP.
