Thursday, June 28, 2018

Egypt leaves rate steady, inflation seen in line with target

     Egypt's central bank left its key policy rates steady for the second month in a row, saying inflation is expected to remain in line with its target for the fourth quarter of this year before declining to single digits after the temporary effect of supply shocks dissipate.
      The Central Bank of Egypt (CBE) kept its overnight deposit rate, the overnight lending rate and the rate of the main operation at 16.75 percent, 17.75 percent and 17.25 percent, respectively.
      This year the CBE has cut the rate by a total of 200 basis points.
       In May last year the CBE set a target for inflation of 13 percent, plus/minus 3 percentage points, for the fourth quarter of 2018 and then single digits thereafter.
       Egypt's urban inflation rate decelerated for the 10th consecutive month in May to 11.4 percent from a high of 32.95 percent in July 2017 while unemployment also continued to decline to 10.6 percent in the first quarter of this year, the lowest rate since the fourth quarter of 2010.
       Inflation surged last year after the government slashed subsidies to energy and raised taxes in connection with a US$12 billion International Monetary Fund (IMF) aid package. In November 2016 the central bank also floated the pound, which quickly lost more than half its value, boosting import prices and thus inflation.
       In January the IMF forecast that inflation would fall to 12 percent by June but also warned against premature rate cuts by the central bank.
       Economic reforms have helped boost foreign and domestic investment and the economy has been growing steadily since the fourth quarter of 2016 and grew by an annual rate of 5.4 percent in the first quarter of this year, up from 5.3 percent in the previous quarter.
       The country's potential output is also estimated to have benefitted from the structural reforms, thus easing inflationary pressures from the pickup in demand, CBE said.
       Egypt's pound has depreciated slightly this year and was trading at 17.89 to the U.S. dollar today,  down 0.4 percent this year.

      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 16.75 percent, 17.75 percent, and 17.25 percent, respectively. The discount rate was also kept unchanged at 17.25 percent.
Annual headline and core inflation continued to decline since August 2017, recording in May 2018 the lowest level since April 2016 at 11.4 and 11.1 percent, respectively. Unemployment also continued to decline, recording in 2018 Q1 the lowest rate since 2010 Q4 at 10.6 percent. Supported by foreign and domestic public investment demand, annual real GDP growth exhibited sustained increases since 2016 Q4, recording in 2018 Q1 a preliminary estimate of 5.4 percent. Meanwhile, potential output is estimated to have benefited from structural reforms in the Egyptian economy, thereby easing inflationary pressures from the pickup in economic demand.
Internationally, financial conditions tightened, and oil prices rose, putting upward pressure on the magnitude of domestic fiscal consolidation. The Ministry of Finance is targeting to achieve a primary balance surplus in the magnitude of 0.2 percent of GDP in fiscal year 2017/18 and 2.0 percent over the following fiscal years. Fiscal consolidation measures are expected to lead to one-off increases in the price level, which translate into temporary higher inflation rates.
Yet, as the recently implemented measures were anticipated, average annual headline inflation is expected to remain in line with the CBE’s target announced in May 2017, namely 13 percent (±3 percent) in 2018 Q4. Single digit inflation is expected to be reached after the temporary effect of supply shocks dissipates. The setting of policy rates in previous MPC meetings has been consistent with this outlook. Accordingly, the MPC decided that keeping key policy rates unchanged remains consistent with achieving the targeted disinflation path.
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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