Since March 2024, the Central Bank of Egypt (CBE) has played a decisive role in implementing inflation targeting, making it clear that this is a primary and strategic goal through historic reform measures announced on 6 March 2024. But what does inflation targeting mean, and why has the CBE adopted this policy?
Combating Inflation
Controlling inflation is one of the most pressing challenges for monetary policies worldwide, affecting both developed and developing economies. Inflation negatively impacts the economy, consumers, and markets, making effective monetary policies crucial for price stability.
Inflation is generally defined as an increase in the money supply at a rate higher than the supply of goods and services, leading to rising prices and a decline in currency value. This devaluation results in a reduction of real income, especially if wages remain fixed or do not increase proportionally to price hikes.
Most economists agree that inflation slows economic growth, reduces the value of money, and weakens confidence in the national currency. It also diminishes the attractiveness of foreign investments, whether direct or indirect. Furthermore, rising inflation increases the cost of locally produced goods intended for export, reducing their competitiveness in global markets. As a result, both the trade balance and the balance of payments are negatively affected.
Given these risks, inflation targeting has become one of the most important monetary policies employed by central banks to control and monitor inflation, ensuring it aligns with predefined targets.
What is Inflation Targeting?
Inflation targeting is a monetary policy approach in which the central bank publicly announces a specific inflation rate as its target. The objective is to achieve this target within a designated time frame, which may be divided into short-term and medium-term goals, ultimately leading to long-term price stability.
For this policy to be effective, three key elements must be in place:
- The establishment of a clear and specific inflation target.
- The commitment of the central bank to achieving this target within the specified timeframe.
- The adoption of a strategic plan that utilises monetary policy tools to reach the goal. Among these tools, interest rate hikes are commonly used, as raising interest rates discourages borrowing and reduces excess liquidity, which in turn helps curb inflation.
A fundamental requirement for the success of this policy is the central bank’s commitment to achieving the target within the specified period. However, if unforeseen external shocks occur, such as wars or pandemics, adjustments to the timeline may be necessary.
If actual inflation deviates from the target, the CBE’s Monetary Policy Committee (MPC) must intervene by adjusting its policies and using the appropriate monetary tools to ensure inflation returns to the desired path. These three components form the backbone of a successful inflation-targeting policy.
Global Experiences in Inflation Targeting
The first country to implement inflation targeting was New Zealand in 1990, and this approach was soon adopted by most industrialised nations. The success of this policy in developed economies encouraged many developing countries to follow suit, using inflation targeting as a key mechanism to reduce inflation and stabilise their economies.
To control inflation, central banks employ various strategies. One of the most widely used methods is reducing the money supply. This is done by raising interest rates to encourage savings and limit excessive borrowing, thereby reducing the availability of credit and circulating cash. Additionally, central banks may use open market operations, adjust reserve requirements for banks, and limit government spending to regulate liquidity.
Egypt’s Adoption of Inflation Targeting
Egypt began applying inflation targeting as part of its 2016–2019 economic reform program. However, the CBE intensified its efforts in March 2024, adopting a strict monetary policy centred on interest rate adjustments.
During the first quarter of 2024, the CBE raised interest rates by 800 basis points to contain rising inflation and guide it toward its long-term targets. The bank has maintained a high interest rate of 27.25% – 28.25%, extending its inflation target timeline to 7% ±2% by Q4 2026 and 5% ±2% by Q4 2028. In the long run, it aims to keep inflation at a stable level that does not exceed 5%.
Open Market Operations
The CBE actively uses open market operations to regulate liquidity and control the money supply. Through its key monetary tools, the bank withdraws excess liquidity from the banking sector, modifies deposit acceptance mechanisms, and ensures price stability. These measures allow it to fine-tune the level of liquidity in the market and effectively manage inflation.
Monetary Policy Outlook and Regional Conflicts
A crucial question arises: Will inflation in Egypt decline in 2025, and are we approaching a shift toward a more expansionary policy that promotes growth and job creation?
While inflation has started to ease due to the restrictive monetary policies adopted by the CBE, rising geopolitical tensions, particularly in the Middle East, pose a significant risk. Additionally, uncertainties surrounding US policies could disrupt global commodity markets, fueling inflationary pressures.
Despite these challenges, economic growth cannot be indefinitely sacrificed in response to external shocks.
Given these risks, it is likely that the CBE will maintain a restrictive monetary stance for an extended period. However, there is speculation that the MPC may consider a rate cut during its upcoming meeting on 20 February.
In my view, this would be a welcomed and logical step – not as an abandonment of tight monetary policy, but rather as a gradual easing that does not allow inflation to spiral out of control. Such an approach would help stimulate economic growth, boost credit demand, reduce consumer costs, and enhance local production and exports. In turn, this could increase supply and lead to a gradual decline in inflation.
At the same time, the CBE will closely monitor inflation trends, ensuring they remain on track to meet the bank’s long-term targets.
Egypt’s monetary policy currently stands between two conflicting forces—the need to curb inflation while simultaneouslyfostering economic growth.
Mohamed Abdel Aal – Banking Expert
