Egypt raises rate 50 bps, won't hesitate to raise further

    Egypt's central bank raised its key rates, including the benchmark overnight deposit rate, by 50 basis points to "address inflationary pressures and anchor inflation expectations" and said it would "not hesitate to adjust the key CBE rates to ensure price stability over the medium-term."
    The Central Bank of Egypt (CBE), which in January this year cut its rate by 50 basis points, raised the overnight deposit rate to 9.25 percent, the overnight lending rate to 10.25 percent, the rate on its main operations and the discount rate to 9.75 percent.
    The central bank's decision comes after the monetary policy committee on Dec. 17 postponed any decisions at its scheduled meeting until today in light of talks with the government aimed at working together to create a economic framework that will stimulate economic growth and create jobs.
    The CBE, led by its governor, Tarek Amer who took over this month, and the government will again meet on Jan. 10.
    Key elements of the new framework include, but is not limited to:
    - Narrowing the fiscal deficit
    - Maintain price stability by avoiding double digit inflation
    - Reducing the trade deficit by encouraging local production
    - Stepping up structural economic reform to raise the potential output

    Inflationary pressures in Egypt have been building, as evidenced by the rise in non-food prices, with headline inflation rising to 11.1 percent in November from October's 9.7 percent but still below the 2015-high of 13.1 percent seen in May. Core inflation rose to 7.44 percent in November from 6.26 percent in October but still below May's 8.14 percent.
    "Looking ahead, while upside risks to the inflation outlook are mitigated by contained imported inflation, in light of broad-based declines in international commodity prices, underlying domestic inflationary pressures could push up inflation expectations," the CBE said.
     The Egyptian pound has been depreciating since 2010 but authorities are under pressure to devalue it even further with a wide gap between official exchange rates and black market rates.
    Today the pound was quoted at 7.83 to the U.S. dollar, down 8.7 percent this year and down 26 percent since the start of 2011.
     Egypt's Net International Reserves rose slightly to US$16.422 billion end-November from October's $16.415 billion but are still below around $20 billion in the months from April through June, and reserves of above $30 billion in the five years preceding the 2011 popular uprising against President Hosni Mubarak.
    The uprising, part of the Arab Spring, resulted in the overthrow of Mubarak and scared off foreign tourists and investors, resulting in a plunge in much-needed foreign currency and revenue.
    Revenue from tourism was dealt another setback in 2013 when the Egyptian army helped remove President Mohamed Morsi.
    In 2014 revenue from tourism amounted to US$7.5 billion compared with $12.5 billion in 2010 but still up from $5.9 billion in 2013.
    Economic growth, however, improved in the 2014/15 fiscal year, which ended June 30, to 4.2 percent compared with 2.2 percent in 2013/14, with strong investment growth more than compensated for the drag from a fall in exports, the CBE said.
    In the second quarter of the 2015 calendar year, Egypt's Gross Domestic Product expanded by an annual 4.5 percent in the second quarter from 3.0 percent in the first quarter.

    The Central Bank of Egypt issued the following statement:

"In its meeting held on December 24, 2015, the Monetary Policy Committee (MPC) decided to raise the overnight deposit rate, overnight lending rate, and the rate of the CBE's main operation by 50 bps to 9.25 percent, 10.25 percent, and 9.75 percent, respectively. The discount rate was also raised to 9.75 percent.
During the Coordinating Council meeting on December 17, the government and the CBE have decided to collaborate on designing a macroeconomic framework, aimed at achieving macroeconomic stability that will contribute positively to economic growth and job creation. The next meeting is scheduled on January 10, 2016. The key elements of the framework include but are not limited to:

•   Narrowing the country’s fiscal deficit to sustainable levels in order to alleviate the pressure on domestic liquidity, avail greater resources to the private sector to increase production, and hence reduce the consequent inflationary pressures from money creation.
  
•   Maintaining price stability by avoiding double digit inflation rates over the medium- term.
  
•   Reducing the country’s trade deficit by initiating a strategy aimed at encouraging local production to meet domestic market needs and enhance imports substitutions.
  
•   Stepping up the structural economic reform agenda to raise the economy’s potential output, by addressing the impediments that challenge increasing investments.
  
  In connection to the latest inflation outturn, inflationary pressures have been slowly building up as evident in the increase in non-food prices, which have contributed to headline and core inflation rates. Annual headline CPI jumped to 11.08 percent in November from 9.70 percent in October, partly on the back of unfavorable base effect from last year, while core inflation increased to 7.44 percent from 6.26 percent in October. Looking ahead, while upside risks to the inflation outlook are mitigated by contained imported inflation, in light of broad-based declines in international commodity prices, underlying domestic inflationary pressures could push up inflation expectations.
  
  On the other hand, real GDP grew robustly by 4.2 percent in 2014/15 after recording 2.2 percent (y/y) growth in 2013/14. The main contributors to growth were the manufacturing, construction, real estate and tourism sectors, while the extractions sector remained weak. In the meantime, strong investment growth more than compensated for the negative contribution of net exports. Looking ahead, while investments in domestic mega projects are expected to continue to contribute to economic growth, the downside risks and uncertainty that surround the global economy on the back of softening growth in emerging markets and challenges facing the Euro Area could pose downside risks to domestic GDP.
  
  
  In view of the above and given the balance of risks surrounding the inflation and GDP outlooks, the MPC judges that a rate hike is warranted to address inflationary pressures and anchor inflation expectations.
  
  The MPC reiterates its price stabileity 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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