Thursday, February 20, 2020

Egypt maintains rates to achieve inflation target

     Egypt's central bank left its key interest rates unchanged for the second consecutive month, saying it had lowered its rates by 350 basis points during the second half of last year and keeping them steady remains consistent with achieving its inflation target and supporting lower inflation in the medium term.
     The Central Bank of Egypt (CBE) left its overnight deposit rate, the overnight lending rate, the rate of the main operation and the discount rate steady at 12.25 percent, 13.25 percent, 12.75 percent and 12.75 percent, respectively.
     The decision to maintain rates was expected by roughly half of analysts' surveyed as CBE was not considered to be in any rush to lower rates while inflation is picking up.
     CBE has cut its rate six times and by a total of 650 basis points since February 2018, including four cuts of 450 basis points in 2019. From August through November the rate was cut 350 points.
     Egypt's headline inflation inched up to 7.2 percent in January from 7.1 percent in December, mainly due to higher food prices such as poultry and fresh vegetables, while core inflation rose to 2.7 percent from 2.4 percent.
      Despite this recent uptick, inflation still remains well below CBE's target of 9.0 percent, plus/minus 3 percentage points, for the fourth quarter of 2020.
     CBE said its monetary policy was still supporting private domestic demand, which has outpaced exports as the main driver of economic activity in the first three quarters of last year, driven by growth in private investments.
     Egypt was hit hard by the Arab Spring in 2011, which ended Hosni Mubarak's 30-year rule, as it scared off tourists and foreign investors, resulting in a persistent shortage of foreign currency.
     But helped by the appointment of Tarek Amer as CBE governor in November 2015 - he reformed the banking system and the foreign exchange market - and a 2016 agreement with the International Monetary Fund (IMF), Egypt's economy has rebounded.
     Egypt's gross domestic product grew an annual 5.6 percent in the third quarter of last year, slightly down from 5.7 percent in the second quarter but up from 5.5 percent in the year ago quarter.
     "However, disruptions to global economic activity following the recent coronavirus outbreak could weigh on the global economic outlook, at least in the near term," CBE said, adding oil prices have declined from lower demand but still remain volatile due to geopolitical risks.
     Since January last year the Egyptian pound has steadily appreciated, with its rise accelerating this month. 
     Today the pound eased after the policy decision to trade at 15.57 to the U.S. dollar to be up 2.8 percent since the start of this year and some 22 percent since the pound lost about half its value in the wake of the decision to float the pound in November 2016.
     The collapse in the pound in 2016 boosted inflation to 33 percent in July 2017 and CBE quickly raised its key interest rate by 400 basis points that year to curb the pass-through of higher import prices to overall inflation.
    After the initial surge in inflation, it began decelerating in the second half of 2017 and fell to 3.1 percent in October last year - the lowest since December 2005 - before picking up speed in the last three months.

     The Central Bank of Egypt issued the following statement:

"The Monetary Policy Committee (MPC) decided to keep the Central Bank of Egypt’s (CBE) overnight deposit rate, overnight lending rate, and the rate of the main operation unchanged at 12.25 percent, 13.25 percent, and 12.75 percent, respectively. The discount rate was also kept unchanged at 12.75 percent.
Annual headline urban inflation recorded 7.2 percent in January 2020 compared to 7.1 percent in December 2019, as monthly inflation recorded 0.7 percent in January 2020 compared to 0.6 percent in January 2019. Monthly headline inflation in January 2020 was mainly driven by higher food prices as well as by higher non-food prices but with a lesser extent. Meanwhile, annual core inflation increased to 2.7 percent in January 2020 compared to 2.4 percent in December 2019. Annual inflation rates came in line with the expectations of the Central Bank of Egypt.
Real GDP growth stabilized around 5.6 percent in 2019 H2 compared to its level in FY2018/19. Monetary policy continued to support private domestic demand, which has outpaced net exports as the main driver of economic activity in the first three quarters of 2019, driven by the acceleration in private investment growth.
While the expansion of global economic activity stabilized, financial conditions and uncertainty regarding trade policies eased somewhat. However, disruptions to global economic activity following the recent coronavirus outbreak could weigh on the global economic outlook, at least in the near term. Meanwhile, international oil prices declined due to lower demand, yet remain subject to volatility due to potential supply-side factors that include geopolitical risks.
Regarding the labor market, the unemployment rate recorded 8.0 percent in 2019 Q4 compared to 7.8 percent and 7.5 percent in 2019 Q3 and Q2, respectively. Nevertheless, employment continued to recover on a quarterly basis for the fourth consecutive quarter.
Against this background, and following the cumulative reduction of 350 basis points during the second half of 2019, the MPC decided that keeping key policy rates unchanged remains consistent with achieving the inflation target of 9 percent (±3 percentage points) in 2020 Q4 and supporting the disinflation path over the medium-term. The MPC closely monitors all economic developments and will not hesitate to resume its easing cycle subject to further moderation of inflationary pressures."


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