The Monetary Policy Committee (MPC) at the Central Bank of Egypt (CBE) said there are a number of challenges in international economies that may increase the risk of decreasing Egypt’s GDP growth rate.
The committee explained in a statement issued Thursday evening that these challenges are include the downside risks and the uncertainty surrounding the reform of the international economy. The risks come within the reduced growth of emerging economies and the problems facing certain countries in the eurozone.
The MPC said despite these challenges, the investments directed to the local mega projects – such as the Suez Canal Area Development Project – are expected to contribute to increasing economic growth.
The committee decided Thursday to raise CBE’s key interest rates by half a percentage point. Consequently, the overnight deposit rate increased to 9.25%, the overnight lending rate increased to 10.25%, and both the CBE’s main operation rate and the discount rate were pushed to 9.75%.
The MPC attributed this decision to inflationary pressures, including the increase in prices of non-food commodities, which contributed to headline and core inflation rates.
The annual headline CPI increased to 11.08% in November compared to 9.7% in October, while core inflation increased to 7.44% compared to 6.26% in October.
“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 MPC said.
On the other hand, MPC noted the GDP achieved a growth of 4.2% through fiscal year (FY) 2014/2015, compared to 2.2% through FY 2013/2014.
The key contributors to the growth achieved in the last FY were the manufacturing, construction, real estate, and tourism sectors, although the extractions sector remained weak. The committee said the increase in investments in Egypt recently mitigated the negative effect of the high deficit in the balance of trade.
“In view of the above and given the balance of risks surrounding the inflation and GDP outlooks, MPC judges said a rate hike is warranted to address inflationary pressures and anchor inflation expectations,” according to the statement.
The committee also noted that it will continue to monitor all economic developments closely, especially the fiscal policy and its effect on the inflation expectations. It will not hesitate to change CBE’s key rates and work to achieve price stability over the medium-term.