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Inflation hike is temporary, expected to decline in the coming period, hence interest rate kept unchanged: MPC - Daily News Egypt

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Inflation hike is temporary, expected to decline in the coming period, hence interest rate kept unchanged: MPC

CBE raised the interest rate by 3% on 3 November 2016 as prelude to hiking inflation

The Monetary Policy Committee (MPC) of the Central Bank of Egypt (CBE) said that the inflation hike witnessed over the past few months is temporary, adding that it will decline in the coming period, which was the reason to maintain the basic interest rate unchanged on Thursday.

In a press release, the MPC stated that the CBE had anticipated that wave and raised the interest rate by 3% on 3 November 2016, when it decided to allow the Egyptian pound to float.

In its meeting held on 16 February 2017, the MPC decided to keep the overnight deposit rate, overnight lending rate, and the CBE main operation rate unchanged at 14.75%, 15.75%, and 15.25% respectively. The discount rate was also kept unchanged from 15.25%.

The committee pointed out that the annual headline inflation rose to 28.14% in January 2017 because of exceptional monthly increases averaging 4.01% between November 2016 and January 2017, which were strongly impacted by the economic reform measures. The higher monthly inflation rate of 4.07% in January compared to 3.13% in December is estimated to be partly driven by relatively higher regular monthly dynamics as well as by the introduction of higher customs tariffs at the end of 2016.

Moreover, the committee explained that between November 2016 and January 2017, inflation has been mainly driven by tradable items, while the contribution of non-tradable items started to decline in December, confirming that cost-push factors are the main inflation driver.

Core items, particularly food, experienced the largest increases, while the joint contribution of retail and services has been narrowing in relative terms. In the meantime, non-core (volatile) food prices and regulated prices also rose somewhat in January.

MPC said that the annual core inflation rose to 30.86% in January 2017 because of an average monthly inflation of 4.89% between November 2016 and January 2017.

Annual real GDP growth declined to 3.4% in Q1 2016/17 after averaging 4.3% between 2014/2015 and 2015/16. The drop was mainly driven by consumption, while the contribution of gross fixed investments held steady as the increase in private investment offset the decline in public investments.

Furthermore, the negative contribution of net exports narrowed, mainly due to the recovery of exports, which registered its first positive contribution to real GDP growth since Q2 2014/15, while the negative contribution of imports lessened.

It noted that the data of the labour market shows that the unemployment rate narrowed to 12.4% in Q2 2016/17, continuing its downward trend after peaking at 13.4% in Q2 2013/14.

Developments in the external environment show that there has been some firming of international commodity prices, while low global inflation and subdued global growth maintain weak, albeit recovering, pressures on domestic prices .

From the monetary perspective, annual broad money growth has been strongly affected by the revaluation effects of its foreign currency components. Excluding revaluation effects, higher broad money growth during November and December came mainly because of the recovery of net foreign assets, evident by the CBE’s international reserve accumulation. In the meantime, the growth of reserve money is expected to be impacted by the phasing out of monetary financing of the fiscal deficit.

Finally, it noted that looking ahead, annual inflation is expected to drop after transitory cost-push effects subside and monthly inflation rates decline, supported by pre-emptive monetary policy actions, term absorption of excess liquidity, as well as favourable base effects.

“Consistent with the inflation outlook, the targeted disinflation path, and 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 and monetary developments, and will not hesitate to adjust the key CBE rates to ensure price stability over the medium-term,” it stated.

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