Daily News Egypt

Inspecting inflation, as IMF warns against reducing interest rates - Daily News Egypt

Advertising Area




Advertising Area



Inspecting inflation, as IMF warns against reducing interest rates

CAIRO: Egypt has achieved a remarkable turnaround in its monetary situation. Until a few years ago, the state of the pound, controlled and overvalued by the government, made imports difficult due to the unavailability of foreign currency and exports too expensive. Subsequent to the devaluation and floatation of the pound in 2003, Egyptian exports have …


CAIRO: Egypt has achieved a remarkable turnaround in its monetary situation. Until a few years ago, the state of the pound, controlled and overvalued by the government, made imports difficult due to the unavailability of foreign currency and exports too expensive.

Subsequent to the devaluation and floatation of the pound in 2003, Egyptian exports have become more attractive and foreign currency has become more readily obtainable by local businesses.

With the change in policy, the central bank s objective of exchange rate stability has been replaced with price stability, and inflation is now the bank s primary target.

Monetary policy should have a nominal target, explains economist Ahmed Galal. The two most common nominal targets are the exchange rate or inflation. It is important that the monetary policy has one target of that kind, because that is how investors, consumers and all economic agents build their expectations about the future … That is one component of macroeconomic stability.

Prices stabilized significantly last year with the rate of inflation falling to 4.1 percent from 17 percent in 2004, although the inflation rate accelerated somewhat to 4.7 percent on a year-on-year basis last month.

In order to regulate the money supply and control price rises, the central bank introduced corridor rates for overnight deposit and lending last year.

The overnight deposit and lending rates were set at 9.5 percent and 12.5 percent, respectively, when the mechanism was first established in June 2005.

Since then, the central bank carried out a series of reductions resulting in the present deposit and lending rates of 8 percent and 10 percent, respectively, but maintained overnight rates at the same level last month.

Domestically, inflation rates continued to hold at moderate levels, despite the most recent inch-up. On the other hand, externally, risks to global inflation are still skewed to the upside and uncertainty surrounds the international interest rate outlook, the Monetary Policy Committee, which sets the corridor rates, said in a statement explaining its decision to leave the rates unchanged.

But regardless of any change in domestic or global conditions, the International Monetary Fund warned the central bank against reducing interest rates until low inflation is more established.

According to Reuters, IMF directors cautioned that any additional interest rate reductions should wait until liquidity growth decelerates further and low inflation becomes firmly entrenched, and noted that financing of the government should be strictly limited.

They are afraid of a situation of what s called monetary permissiveness, when capital becomes unduly cheap, and that may fuel inflation again, says economist Samir Radwan, managing director of the Economic Research Forum.

Radwan explains that the IMF takes a cautious approach to monetary policy, making price stability a priority over economic growth.

This is an age old controversy between those who believe that you can run the economy on the basis of a good monetary policy … I believe that effective demand will motivate the economy, says Radwan.

Radwan therefore considers an inflation rate of 5 percent to 7 percent acceptable if it stimulates economic activity. I am not frightened of a bit of inflation if that increases the growth rate, says Radwan.

There is a question, however, regarding the accuracy of the inflation rate in the first place.

Inflation is calculated based on consumer prices gathered by the Central Agency for Public Mobilization and Statistics (CAPMAS).

A very well-known problem with inflation numbers is that they depend very much on what prices you use to calculate them, says Radwan.

Food is the largest component in the basket of goods used to calculate inflation, and while municipalities fix official prices for fruits and vegetables, the actual prices are much higher in the marketplace.

Another major component in the basket is housing. Rents may vary substantially in this regard, with state-owned apartments being much cheaper than other accommodation.

The weight assigned to each item in the basket of goods may also misrepresent various income groups.

The problem starts for certain groups, especially the poorer groups, where their expenditure is dominated by food, clothing, transport, health and education, and the claim is that the price increase in those items was much faster than the price increase in other items, says Radwan.

Although this may not necessarily affect the central bank s approach to interest rates, it has a material impact on other determinations for which prices are a crucial factor, such as the government s wage policy.

Topics: FJP

Advertising Area

Advertising Area



https://www.dailynewsegypt.com/2006/07/14/inspecting-inflation-as-imf-warns-against-reducing-interest-rates/
Breaking News

No current breaking news

Daily News Egypt Android App Available for free download on Google play
View
Daily News Egypt Ios App Available for free download on APP Store
View
Social Media Auto Publish Powered By : XYZScripts.com