Egypt holds rate steady given lagged effect of March hike

    Egypt's central bank left its key policy rates unchanged, as expected, saying they were appropriate given the lagged effect from the sharp hike in March and the balance of risks surrounding the outlook for growth and inflation.
    The Central Bank of Egypt (CBE), which last month raised its key rates by 150 basis points to anchor inflation expectations after devaluing the pound and moving to a more flexible exchange rate regime, said "potential underlying domestic inflationary pressures are still under watch" even as upside risks to inflation were mitigated by subdued international commodity prices.
    The central bank's benchmark overnight deposit rate was left at 10.75 percent, the overnight lending rate at 11.75 percent and  the rate on its main operation at 11.25 percent.
    Egypt's inflation rate eased for the third consecutive month to 9.03 percent in March from February's 9.13 percent to the lowest rate since September last year due to a favorable base effect.
   But core inflation, as calculated by the CBE, rose to 8.41 percent from 7.50 percent in February, manly driven by higher food prices.
    Preliminary data show that Egypt's economy expanded by 3.5 percent in the first half of the 2015/16 fiscal year, which ended Dec. 31, with growth mainly from construction and real estate services despite the continued contraction in tourism and weakness in mining.
    Looking ahead, the CBE said investments in mega projects are expected to continue to contribute to growth but downside risks to the global economy could pose downside risks.
    On March 14 the CBE devalued the pound by almost 13 percent and adopted a more flexible exchange rate policy aimed at relieving years of foreign currency shortage by creating a more favorable investment climate and attract capital inflows.
    At this week's auction, the CBE sold $118.7 million at its official rate of 8.78 to the dollar. Initially, the pound was devalued to 8.85 a dollar from 7.73 but a few days later the exchange rate was moved higher as the new exchange rate regime was announced.
    The central bank has also been trying to do away with the black market for foreign currency where the pound has recently been trading at over 11 to the dollar.
    Egypt has been facing a shortage of foreign currency since the popular uprising in 2011 that resulted in the overthrow of Hosni Mubarak, scaring off foreign tourists and investors. Foreign currency revenue from tourists was dealt another blow in 2013 when the Egyptian army helped remove President Mohamed Morsi.
    In March Egypt's international reserves were $16.56 billion, still well below reserves in excess of $30 billion in the five years preceding the Arab Spring, but up from $16.445 billion end-December.
 
  The Central Bank of Egypt issued the following statement:

"In its meeting held on April 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 10.75 percent, 11.75 percent, and 11.25 percent, respectively. The discount rate was also kept unchanged at 11.25 percent.

Annual headline CPI remained at around 9 percent in February and March 2016, after registering 10 percent in January 2016 and 11 percent in December 2015. On the other hand, annual core CPI increased to 8.4 percent in March from 7.5 percent in February. Monthly developments have been largely driven by the rise in food prices.

Looking ahead, while the upside risks to the domestic inflation outlook are mitigated by contained imported inflation, in light of the subdued international commodity prices, potential underlying domestic inflationary pressures are still under watch.

Preliminary data reveal that during 2015/16 H1 GDP at market prices grew by 3.5 percent. Growth came mainly from the construction and real estate services, despite the continued contraction in tourism and the weaknesses in the extractions sector. In the meantime, growth was largely driven by consumption, in addition to a positive contribution of investment. On the other hand, net exports contributed negatively to GDP in H1, driven by weaker exports, while imports have been contributing positively, given their relative decline.

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 could pose downside risks to domestic GDP.

At this juncture, and given the expected lagged effect from the previous interest rate hike, 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."

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