Thursday, September 22, 2016

Egypt leaves rate steady, says rise in inflation transitory

    Egypt's central bank left its key policy rates unchanged, attributing the rise in inflation and future upside inflation risks to "transitory cost-push factors" while the demand side poses a risk to the outlook for inflation.
   The Central Bank of Egypt (CBE), which has raised its rate by 250 basis points this year, left the benchmark overnight deposit rate at 11.75 percent, the overnight lending rate at 12.75 percent, and the rates on its main operation and the discount rate at 12.25 percent.
   Egypt's headline inflation rate accelerated to 15.47 percent in August - its highest level since December 2008 -  from 14.0 percent in the previous two months as Egypt's government implements reforms, including a cut to energy subsidies and the imposition of value-added-tax (VAT), that will help trim the budget deficit but push up prices.
    In addition, the prices of fresh vegetables rose and there was a seasonal rise in the cost of meat in connection with Eid-Al-Adha while the pass-through from past exchange rate movements to domestic prices was limited.
   In August the International Monetary Fund (IMF) agreed in principle to grant Egypt a $12 billion, 3-year loan to support the government's reform program and help its foreign currency shortage.
    The extended fund facility is subject to final approval by the IMF executive committee and on Sunday the country's deputy finance minister was quoted as saying it was making good progress that would help release the first tranche of the loan.
    The funds would help bolster Egypt's international reserves of US$16.6 billion, still about half of the levels seen before the uprising in 20111 that ousted Hosni Mubarak from power. Egypt is also planning to sell between $3 billion and $5 billion in international bonds and is in talks with China for a $4 billion loan to help finance sewage and renewable energy projects.
    The central bank added that the country's economy expanded by 4.3 percent in the first nine months of the 2015/16 financial year, down from 4.8 percent in the same period a year ago, with growth driven by domestic demand from consumption while investment was weak.

    The Central Bank of Egypt issued the following statement:

"In its meeting held on September 22, 2016, the Monetary Policy Committee (MPC) decided to keep the overnight deposit rate, overnight lending rate, and the rate of the Central Bank of Egypt's (CBE) 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 15.47 percent in August 2016 from 14.0 percent in July 2016 as the month-on-month rate increased to 1.93 percent in August from 0.74 percent in July. In the meantime, core inflation rose to 13.25 percent in August 2016 from 12.31 percent in July 2016 as the month-on-month rate increased to 0.61 percent in August from 0.25 percent in July.

Monthly headline inflation in August 2016 came mainly due to higher prices of regulated items, primarily electricity, in addition to increases in prices of fresh vegetables and seasonal increases in prices of red meat associated with Eid-Al-Adha. The pass-through from previous exchange rate movements to domestic prices as measured by the consumer price index remained limited.
Real GDP growth registered 4.3 percent during the first nine months of 2015/16, down from 4.8 percent during the respective period of the previous year. Growth was driven by domestic demand, while net external demand contributed negatively. Domestic demand came largely due to consumption expenditure, while the contribution of investment expenditure was weak. By sector, real GDP growth was driven mainly by services, despite the contraction of tourism. General government, trade and the agricultural sectors contributed positively as well. These positive contributions were partly offset by the adverse impact stemming from the industrial sector, which was mainly driven by weaknesses in the mining sector, as the contribution of the manufacturing sector was negligible.

The current level of inflation and future upside risks are largely explained by transitory cost- push factors, while demand-side factors continue to pose downside risks to the inflation outlook. Given the balance of risks, the MPC judges that the key CBE rates are currently appropriate. 

The MPC reiterates its price stability 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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