Thursday, July 28, 2016

Egypt maintains rate on balanced risk to inflation, growth

    Egypt's central bank left its key policy rates steady, as expected by most economist, saying the current rates were appropriate given the balance of risks surrounding the outlook for inflation and economic growth.
    In its statement, the Central Bank of Egypt's (CBE) monetary policy committee dropped last month's reference to the need for fiscal consolidation. Egypt is expected to replace its current sales tax with a long-awaited Value Added Tax (VAT) by September as part of a fiscal reform that also aims to cut energy subsidies to help trim the budget deficit.
    The CBE, which has raised its rates by a total of 250 basis points following hikes in March and June, acknowledged the headline inflation rate accelerated to 13.97 percent in June from 12.30 percent in May but noted the monthly rate had dropped to 0.78 percent from 3.05 percent in May.
    The rise in inflation was partly due to unfavorable base effects and inflation was also pushed up by higher food prices, particularly red meat and poultry, along with seasonal increases for clothing and footwear in connection with Eid-Al-Fitr festivities that mark the end of Ramadan.
    The central bank made little reference to the exchange rate of the Egyptian pound apart from saying that the pass-through of previous movements to domestic prices remained limited.
    Last week CBE Governor Tarek Amer said to a local news agency that the time was not right to float the pound, with a devaluation depending on what the bank considers to be an appropriate time.
    The pound is currently trading around 8.88 to the U.S. dollar following an almost 14 percent devaluation in March to help relieve years of foreign currency shortage by creating a more favorable investment climate and attract capital inflows.
    However, a black market for foreign currency continues to exist, with the pound trading above 11 to the dollar.
    The CBE's main benchmark overnight deposit rate was maintained at 11.75 percent, the overnight lending rate at 12.75 percent and the rate on its main operation at 12.25 percent. The discount rate was left at 12.25 percent.

    The Central Bank of Egypt issued the following statement:

"In its meeting held on July 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 11.75 percent, 12.75 percent, and 12.25 percent, respectively. The discount rate was also kept unchanged at 12.25 percent.

Headline year-on-year inflation rose to 13.97 percent in June 2016 from 12.30 percent in May 2016, while the month-on-month rate dropped to 0.78 percent in June from 3.05 percent in May. Core inflation rose to 12.37 percent in June 2016 from 12.23 percent in May 2016, while the month-on-month rate dropped to 0.74 percent in June from 3.15 percent in May.

Annual headline inflation in June 2016 was partly affected by unfavorable base effects from the previous year and remained elevated due to the relatively high month-on-month inflation in May 2016. Monthly headline inflation in June 2016 came mainly on the back of higher prices of volatile food items, in addition to core food items, particularly red meat and poultry. Furthermore, monthly headline inflation was affected by retail items, particularly seasonal increases in the prices of clothing and footwear associated with the Eid-Al-Fitr festivities. The pass-through of previous exchange rate movements to domestic prices as measured by the consumer price index remained limited.

Output remained unfavorably impacted by domestic as well as external factors. Domestic demand contributed 4.8 percentage points to the 4.5 percent real GDP growth in the first half of 2015/16, while net external demand contributed negative 0.3 percentage points. By sector, the services sector was the highest contributor to economic growth, particularly construction and real estate, while tourism contributed negatively. Furthermore, growth continued to be supported by internal trade, agriculture and the general government sectors, whereas the industrial sector contributed negatively mainly due to continued weakness in the mining activity, but also due to negative contribution of non-petroleum manufacturing.

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."


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