Thursday, November 27, 2014

Egypt holds rate steady on contained inflation risks

    Egypt's central bank maintained its overnight deposit rate at 9.25 percent, noting contained upside risks from imported inflation due to lower international food prices while softer growth in emerging markets and challenges facing the euro area could pose downside risks to domestic growth.
    The Central Bank of Egypt (CBE) - which raised its rate by 100 basis points in July to curb inflation after prices rose from the government cut in fuel subsidies - said a rise in October headline inflation to 11.8 percent from 11.2 percent was due to the normal increase in education fees at the start of the school year.
    And while the cost of fresh vegetables inched up, prices of other food items declined further due the fall in international prices, notwithstanding the seasonal pick-up in September, the CBE said.
    Egypt's core CPI eased to 8.47 percent in October from 9.15 percent in September.
    Egypt's economy, which was hard hit by political unrest and the ousting of Hosni Mubarak in 2011, has started to rebound, with Gross Domestic Product up by an annual 3.7 percent in the second quarter, up from a rate of 2.5 percent in the first quarter.
    The expansion was due to an acceleration in manufacturing and real estate along with moderate growth in construction while tourism and petroleum sectors continued to contract.

    The Central Bank of Egypt issued the following statement:

"In its meeting held on November 27, 2014, 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.

Headline CPI inched up by 1.71 percent (m/m) in October 2014, following an increase of 1.23 percent (m/m) in September. This brings the annual rate to 11.84 percent in October, after recording 11.12 percent in September. The monthly developments in October came on the back of increases in public and private education fees, which usually coincide with the beginning of the school year. In the meantime while prices of fresh vegetables inched-up, prices of other food items continued to decelerate supported by the decline in international prices, notwithstanding the seasonal pick-up in September due to Eid Al-Adha. On the other hand, core CPI increased by 0.55 percent (m/m) in October, compared to 0.84 percent (m/m) in September. The annual rate eased to 8.47 percent in October from 9.15 percent in September, partly reflecting the decline in food prices and a favorable base effect. Upside risks from imported inflation continue to be contained on the back of lower international food price forecasts in light of global developments.

Meanwhile, real GDP picked up significantly in 2013/2014 Q4, growing by 3.70 percent compared to 2.50 percent, 1.44 percent and 1.04 percent recorded in Q3, Q2 and Q1, respectively. This brought the annual growth rate for the whole FY2013/2014 to 2.2 percent following a similarly sluggish growth rate of 2.1 percent during FY2012/2013. The expansion in economic activity during 2013/2014 Q4 came on the back of the acceleration in manufacturing and real estate activities, along with a moderate growth in the construction sector. This occurred despite the continued contraction witnessed in the tourism and petroleum sectors. In the meantime, investment continues to be below historical levels despite the relative improvement witnessed in the annual growth rate during 2013/2014 Q3 and Q4, following six quarters of contraction. Looking ahead, while investments in domestic mega projects such as the Suez Canal are expected to contribute to economic growth, the downside risks that surround the global recovery on the back of challenges facing the Euro Area and the softening growth in emerging markets 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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