Egypt holds rates, concerned over inflation pressures

    Egypt's central bank left its key rates unchanged but said "potential underlying domestic inflationary pressures remain a concern" despite the mitigation of upside risks to inflation from the broad-based decline in international commodity prices.
    The Central Bank of Egypt (CBE), which in December raised its rates by 50 basis points, including the benchmark overnight deposit rate to 9.25 percent, repeated that it was closely monitoring fiscal policy and its effect on inflation and "will not hesitate to adjust the key CBE rates to ensure price stability over the medium term."
    The rate hike on Dec. 24 rate followed talks with the government and the arrival of a new CBE governor, Tarek Amer, who has been taking steps to improve confidence in the Egyptian pound and tackle the shortage of foreign currency, which is hampering imports and economic growth.
     Earlier this week the central bank eased its restrictions on U.S. dollar deposits for importers of food, machinery, spare parts, capital goods and medicine. The monthly limit on deposits was raised to $250,000 from $50,000 and a daily limit was scrapped, as long as monthly amounts aren't exceeded.
    The easing of deposit limits follows the imposition of stricter rules on imports of what is considers to be non-essentials goods in an effort to reduce imports and preserve reserves.
     In February last year, the central bank imposed the foreign currency deposit limits to curb the black market for foreign exchange and address the shortage of foreign exchange.
    Egypt's Net International Reserves rose to US$16.445 billion at the end of December from $16.422 billion end-November but are still below around $20 billion in the months from April through June, and reserves of above $30 billion in the five years preceding the 2011 popular uprising against President Hosni Mubarak.
    The uprising, part of the Arab Spring, resulted in the overthrow of Mubarak and scared off foreign tourists and investors, resulting in a plunge in much-needed foreign currency and revenue.
    Revenue from tourism was dealt another setback in 2013 when the Egyptian army helped remove President Mohamed Morsi.
    Egypt's headline inflation rate was steady at 11.1 percent in December from November, supported by recent government measures to control the prices of basic food items and a seasonal fall in food prices, while the core inflation rate eased to 7.23 percent from 7.44 percent.
    Egypt's economy expanded by 4.2 percent in fiscal 2014/15, which ended June 30, up from 2.2 percent in 2013/14, helped by manufacturing, construction, real estate and tourism. Strong growth of investment more than compensated for the negative contribution to output of exports, CBE said.

    
    The Central Bank of Egypt issued the following statement:

"In its meeting held on January 28, 2016, 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 9.25 percent, 10.25 percent, and 9.75 percent, respectively. The discount rate was also kept unchanged at 9.75 percent.

Annual headline CPI remained largely unchanged at 11.06 percent in December 2015, despite the slight monthly decline of 0.09 percent (m/m). The monthly outturn was largely subdued on the back of the seasonal decrease in volatile food prices, in addition to the muted movement in the prices of other food, supported by recent government measures to control the prices of basic food items. On the other hand, annual core CPI declined to 7.23 percent in December from 7.44 percent in November, supported by a favorable base effect from the previous year, despite the slight monthly inch up of non-food prices. Looking ahead, while the upside risks to the domestic inflation outlook are mitigated by contained imported inflation, in light of the broad-based decline in international commodity prices, particularly given the latest global developments, potential underlying domestic inflationary pressures remain a concern.

The latest data available reveals that real GDP grew robustly by 4.2 percent in 2014/15 after recording 2.2 percent (y/y) growth in 2013/14. The main contributors to growth were the manufacturing, construction, real estate and tourism sectors, while the extractions sector remained weak. In the meantime, strong investment growth more than compensated for the negative contribution of net exports. Looking ahead, while investments in domestic mega projects are expected to continue to contribute to economic growth, the downside risks that surround the global economy given the latest global market developments 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 reiterates its price stability mandate and will continue to closely monitor all economic developments, particularly fiscal policy and its effect on the inflation outlook, and will not hesitate to adjust the key CBE rates to ensure price stability over the medium-term."

    www.CentralBankNews.info