Egypt holds rate on contained risks to higher inflation

    Egypt's central bank left its benchmark overnight deposit rate at 8.75 percent, along with its other key rates, as expected, with the bank confirming its view from recent months that "upside risks to the inflation outlook from domestic supply shocks are largely mitigated by contained imported inflation, against the background of broad-based declines in international commodity prices."
    The decision by the Central Bank of Egypt (CBE) was largely expected and comes a week after the presidency said CBE Governor Hesham Ramez would resign when his term ends on November 26 to be replaced by Tarek Amer, former chief executive of the National Bank of Egypt, the oldest and largest bank in the country.
     Under Ramez, who took over the CBE in February 2013, the Egyptian pound has been devalued several times, but critics have said the pound has still been kept at too high a level and the central bank has had to use foreign reserves to maintain its rate.
    This year the pound was devalued in January, February, July and earlier this month. Today it was quoted at 8.0 to the U.S. dollar, down 21 percent since the beginning of 2013 and 11 percent this year.
    Egypt's inflation rate rose to 9.21 percent in September from 7.88 percent in August.
    The country's Gross Domestic Product grew by by an annual 3.0 percent in the third quarter of the 2014/15 fiscal year, which ends on June 30, compared with 2.2. percent expansion in the 2013/14 fiscal year.
    The CBE repeated that uncertainty surrounding the global economy on the back of softer growth in emerging markets and challenges in the euro area could pose downside risks to growth despite the contribution of domestic mega projects.


   The Central Bank of Egypt issued the following statement:
   

    "In its meeting held on October 29, 2015, the Monetary Policy Committee (MPC) decided to keep the overnight deposit rate, overnight lending rate, and the rate of the CBE's main operation unchanged at 8.75 percent, 9.75 percent, and 9.25 percent, respectively. The discount rate was also kept unchanged at 9.25 percent.

Headline CPI increased by 2.47 percent (m/m) in September following 0.63 percent in August, leading the annual rate to jump to 9.21 percent from 7.88 percent. On the other hand, core CPI increased by 0.79 percent in September compared to a decline of 0.23 percent in August, while the annual rate remained largely unchanged at 5.55 percent, on the back of a favorable base effect from the previous year. The continued acceleration in the prices of volatile food items explain the bulk of monthly headline CPI developments and has widened the divergence between the headline and core inflation rates. Upside risks to the inflation outlook from domestic supply shocks are largely mitigated by contained imported inflation, against the background of broad-based declines in international commodity prices.

Meanwhile, real GDP grew by 3.0 percent (y/y) in 2014/15 Q3 to record 4.6 percent (y/y) in the first nine months of the fiscal year. This comes after real GDP growth recorded 2.2 percent (y/y) during 2013/14. The main contributors to growth during 2014/15 Q3 were the internal trade, construction, building and the real estate sectors, while the extractions sector remained weak. In the meantime, investment growth more than compensated for the negative contribution of the widening trade deficit. Looking ahead, while investments in domestic mega projects are expected to contribute to economic growth, the downside risks and uncertainty that surround the global economy on the back of softening growth in emerging markets and challenges facing the Euro Area could pose downside risks to domestic GDP.

At this juncture, the MPC judges that the key CBE rates are currently appropriate given the balance of risks surrounding the inflation and GDP outlooks.

The MPC will continue to closely monitor all economic developments and will not hesitate to adjust the key CBE rates to ensure price stability over the medium-term."

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