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CBE raises interest rates 2% for second time in 2 months - Daily News Egypt

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CBE raises interest rates 2% for second time in 2 months

Deposits increased to 18.75%, loans to 19.75%


On 6 July 2017, the Central Bank of Egypt’s (CBE) Monetary Policy Committee (MPC) decided to raise the overnight deposit rate, the overnight lending rate, and the rate of the Central Bank of Egypt’s (CBE) main operation by 200 basis points to 18.75%, 19.75%, and 19.25% respectively. The discount rate was also raised by 200 basis points to 19.25%.

Annual headline inflation in May 2017 fell for the first time since October 2016 to record 29.7%, compared to 31.5% in the preceding month. The drop was partly due to a favourable base effect stemming from the exchange rate depreciation in March 2016, which had a strong impact on prices in May 2016.

Meanwhile, annual core inflation continued to be supported by favourable base effects since March 2017, dropping to 30.6% in May from 33.1% in February. Monthly headline inflation stabilised at 1.7% in May 2017, while monthly core inflation rose to 2% in May from 1.1% a month earlier. The impact of the November 2016 economic reform measures on prices of goods and services has largely passed through, with the lagged impact affecting the prices of items that witnessed delayed or seasonal consumption—such as pilgrimage services in May—which contributed 0.6 percentage points and 0.9 percentage points to headline and core inflation respectively.

Excluding the effects of transitory shocks, underlying inflation remained somewhat high, which is why the CBE reached that target, and this was affected by price-setting behaviour that is in line with annual inflation of 10% historically. This has been further magnified recently by the second-round effects of the economic reform measures. This has been reflected especially in food components of core consumer goods as well as producer prices. Additionally, higher prices of hydrocarbon products, effective on 29 June 2017, higher value added taxes effective on 1 July 2017, higher electricity prices in July 2017, as well as other potential regulated price adjustments further increase inflationary pressures.

Annual real GDP grew by a revised 4.3% in the third quarter (Q3) of fiscal year (FY) 2016/17, strengthening from the 3.8% and 3.4% recorded in the preceding quarters as well as from the 3.6% recorded in Q3 FY 2015/16. This coincided with the narrowing of the unemployment rate to 12% in Q3 FY 2016/17, from 12.4% and 12.6% in the preceding quarters. The structure of economic growth shifted with declining contribution of consumption and increasing contribution of net exports, as well as investment to a lesser extent. Tourism, natural gas, trade, construction, and non-petroleum manufacturing were the main sectors driving economic growth. This was partly supported by looser monetary conditions stemming from the exchange rate depreciation.

Annual broad money (M2) growth has been strongly affected by revaluation effects of its foreign currency components, recording 39.4% in May 2017. Excluding revaluation effects, annual broad money growth increased to 22.1% in May 2017, mainly due to the recovery of net foreign assets as well as higher loans to the private sector, while the contribution of net claims on the government eased, given higher net external and non-bank financing. In the meantime, annual reserve money (M0) growth, adjusted by overnight deposits and seven-day deposit auctions, declined to reflect the absorption of short-term excess liquidity, consistent with the tighter monetary policy stance. Furthermore, currency in circulation outside the CBE as a percent of local currency deposits has been reverting to pre-2011 averages, implying normalisation of money holding behaviour.

Developments in the external environment show some firming of international commodity prices on annual terms, despite registering monthly declines since March 2017 mainly as a result of crude oil prices, while food prices declined at a relatively slower pace. Meanwhile, global inflation and economic growth continue to maintain weak pressures on domestic prices, given their moderate recovery, which supports the gradual tightening of global monetary conditions.

Against this background, the balance of risks surrounding the inflation outlook has tilted more strongly to the upside with recent economic and monetary developments. Consequently, the MPC decided that tightening monetary conditions is warranted to achieve the inflation target of 13% (+/- 3%) in Q4 2018 and single digits thereafter. The MPC reiterates that the objective of its tighter stance is not to offset first-round effects of supply-shocks, but rather to contain second-round effects and ensure that the inflation outlook is consistent with achieving the targeted disinflation path. As soon as underlying inflation starts to moderate, the MPC envisages a measured easing of the monetary stance to allow for a reduction in interest rates.

The MPC will continue to closely monitor all economic and monetary developments as well as the balance of risks, and will not hesitate to adjust its stance to offset anticipated upside or downside deviations from the inflation target.

Topics: CBE

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https://dailynewsegypt.com/2017/07/06/cbe-raises-interest-rates-2-second-time-2-months/
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