Thursday, February 15, 2018

Egypt cuts rate 100 bps as inflation 'pressures contained'

      Egypt's central bank cut its key policy rates by 100 basis points, its first cut since January 2015, saying data confirms a moderation of underlying inflationary pressures and confidently declaring that "inflationary pressures have been contained."
      The rate cut was widely expected after inflation fell to 17.1 percent in January, the lowest since October 2016, continuing the steady fall from almost 33 percent in July when prices soared after the government raised fuel and electricity prices as part of an IMF-backed reform to deregulate the economy and rein-in government spending.
       Last week Tarek Amer, governor of the Central Bank of Egypt (CBE), fueled rate cut speculation by saying the central bank planned to start easing monetary policy "soon" once it's sure inflation is under control.
       Prior to today's rate cut, the CBE had maintained its rates since July 2017 when it completed a 1,000 basis point tightening cycle that began in December 2015.
       Since November 2016, when the CBE liberalized its foreign exchange market and allowed the pound to float, rates were raised by 700 basis points.
       Today's 1.0 percentage point rate cut brings down the overnight deposit rate, the overnight lending rate and the rate on its main operation to 17.75 percent, 18.75 percent, 18.25 percent respectively. The discount rate was also cut 100 points to 18.25 percent.
       "Inflationary pressures have been contained, a consequence of tighter real monetary conditions," the CBE said, adding that its monetary policy committee "will not hesitate to adjust its stance to achieve its mandate of price stability over the medium term."
      The CBE is targeting inflation of 13 percent, plus/minus 3 percentage points, by the fourth quarter of this year and then single digits thereafter.

      Last month Egypt's finance minister said he expected inflation to fall to 10-12 percent during this year and then below 10 percent in 2019, and the International Monetary Fund also forecast that inflation would fall to 12 percent by June and single digits by 2019.
       Egypt's economy suffered a severe blow in the wake of the Arab Spring in 2011 but has been steadily improving, helped by stronger external demand and a more competitive exchange rate along with public demand that has helped offset lower private demand.
       The CBE said Gross Domestic Product grew for the fifth consecutive quarter to 5.3 percent in December for 2017 growth of 5.0 percent, the highest since 2010.
       Egypt's pound has been relatively stable since the central bank floated the currency in November 2016 apart from a brief dip and then rebound about 12 months ago.
       Today the pound was quoted at 17.3 to the U.S. dollar, up 2.9 percent this year as investors slowly return to Egyptian assets. However, the pound is 49 percent lower than the peg of 8.8 to the dollar in the days running up to the float of the currency on Nov. 3, 2016.

      The Central Bank of Egypt issued the following statement:

"In its meeting held on February 15, 2018, the Monetary Policy Committee (MPC) decided to cut the overnight deposit rate, overnight lending rate, and the rate of the Central Bank of Egypt's (CBE) main operation by 100 basis points to 17.75 percent, 18.75 percent, and 18.25 percent, respectively. The discount rate was also cut by 100 basis points to 18.25 percent.
Inflationary pressures have been contained, a consequence of tighter real monetary conditions. This has been evident by relatively tame monthly inflation figures, despite being affected by upward adjustments of regulated prices.
As incoming data continued to confirm the moderation of underlying inflationary pressures, the MPC decided to cut key policy rates by 100 basis points. This remains consistent with tight real monetary conditions; a necessary requirement to achieve the inflation target of 13 percent (±3 percent) in 2018 Q4 and single digits thereafter.
Annual headline and core inflation rates declined for the sixth consecutive month in January 2018 to record 17.1 percent and 14.4 percent, in line with projections, after peaking in July 2017 at 33.0 percent and 35.3 percent, respectively. Headline and core annual inflation rates thereby registered the lowest rates since October 2016 and September 2016, respectively. Favorable base effects have been accelerating the decline of annual inflation rates since November 2017.
Meanwhile, real GDP growth continued to improve for the fifth consecutive quarter to record 5.3 percent in December 2017 and 5.0 percent during 2017, the highest economic growth since 2010.
The pickup of economic growth was largely boosted by higher net external demand, due to more competitive exchange rates, followed by public domestic demand, which have more than offset lower private domestic demand. Output growth by economic activity was relatively diversified, and 83 percent of which was supplied by the private sector.
The pick-up of economic activity coincided with the continued narrowing of the unemployment rate to 11.3 percent in December 2017, registering the lowest rate since December 2010.
The MPC closely monitors all economic developments and will not hesitate to adjust its stance to achieve its mandate of price stability over the medium term."


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