CAIRO: The Egyptian central bank said on Sunday it was not against easing monetary policy, but would only do this at the right time, raising expectations it may leave key overnight interest rates unchanged this week.
Central Bank Governor Farouk El-Okdah told a news conference the bank expects inflation to begin dropping to acceptable rates in January, putting the Monetary Policy Committee (MPC) in a position to cut rates.
The governor also said foreign reserves dipped in November for the first time in four years. Foreign direct investment also fell, shedding 44 percent in the first quarter of the current 2008/09 fiscal year as the global financial crisis spread.
We are not against cutting interest rates, but at the right time, when we can totally control inflation, he said.
Starting January we will see inflation at acceptable figures and declining further. When we see inflation that satisfies us … the (bank) will be in a position to ease monetary policy, he said. This is when we are sure that our expectations are right.
Annual inflation in urban parts of the Arab country, the figure the central bank says it monitors, rose slightly to 20.3 percent in November from 20.2 percent in the year to October.
Okdah said all central bank forecasts show that inflation would drop to between 10 to 12 percent in June, roughly in line with market expectations.
Several economists and bankers say they expected the central bank would cut overnight rates by 50 basis points to 11 percent for deposit and 13 percent for lending, benefiting from base effects and a decline in global commodity prices. The bank nudged rates higher six times over the past year.
But Reham El-Desoki, a senior economist at the Cairo-based investment bank Beltone Financial, said the central bank may refrain from easing rates when it meets on Thursday.
With the faster decline in inflation starting in January, mainly due to base effects, we expect the central bank could then be inclined to cut rates in February, she said.
Currency reserves, FDI down
Okdah said in October that monetary policy would act to support economic growth in the face of the turmoil in global financial markets, but reiterated later that his overriding objective remained price stability.
Inflation emerged as a tough challenge for Egyptian authorities over the past year, with high prices and low wages triggering violent protests in several parts of the country.
The government has said the global crisis would take a toll on foreign investment and revenue from tourism and the Suez Canal, dragging real economic growth well below the 7.2 percent it recorded in the 2007/08 fiscal year.
Okdah said foreign currency reserves fell to $34.4 billion in November from around $35 billion a month earlier.
Foreign direct investment also dropped to $1.65 billion in the first quarter of the current 2008/09 fiscal year from $2.96 billion in the same period a year earlier, he said.
Outgoing portfolio investment soared in the first quarter to some $3.5 billion compared to $1.4 billion in the same period a year earlier. Okdah said around 90 percent of the portfolio investments that exited the country were treasury bills held by foreign investors.
The hot money that entered Egypt in the last two years has gone out and we have dealt with this, he said.