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Central Bank holds key rates for second month - Daily News Egypt

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Central Bank holds key rates for second month

CAIRO: After a streak that saw Egypt’s Central Bank cut interest rates six times, the bank’s Monetary Policy Committee (MPC) announced late Thursday that it would hold its key rates. For a second straight month, therefore, the overnight deposit rate would remain 8.25 percent and the overnight lending rate would stay 9.75 percent. As the …


CAIRO: After a streak that saw Egypt’s Central Bank cut interest rates six times, the bank’s Monetary Policy Committee (MPC) announced late Thursday that it would hold its key rates.

For a second straight month, therefore, the overnight deposit rate would remain 8.25 percent and the overnight lending rate would stay 9.75 percent.

As the Central Bank continued to slash rates throughout the summer and early fall, discussions increased as to when the return of inflationary pressures might cause the MPC to hold off on further cuts.

The MPC was, on the other hand, under pressure to pull Egypt out of its economic slump, brought about by the general deterioration of the global economy.

Inflation and recovery were central to the bank’s decision to maintain its rates.

“The MPC assesses that the current level of policy interest rate is appropriate and supportive of the economic recovery while consistent with maintaining core inflation within the CBE s comfort zone in the medium-term, wrote Dr Rania Al-Mashat, Division Chief of the Monetary Policy Unit.

Headline Consumer Price Index (CPI) inflation, according to Al-Mashat, jumped from 9 percent in August to 10.8 percent in September. Throughout the summer inflationary pressures receded, opening the door for the MPC to cut rates in an effort to stimulate the economy. These latest numbers represent a reversal of that trend.

Beltone Financial, which predicted that the MPC might either hold rates or cut them slightly, says it views the MPC as fairly tolerant to short-term inflation, indicating that the bank’s objective of spurring economic growth might, in some instances, overrule small increases in inflation.

“While we expect headline inflation to rise to 15 percent by the end of 2009, before declining below 10 percent in 2Q 2010, the CBE’s forward-looking policy suggests it could tolerate the higher short-term inflation, provided that inflation could decline in the six months time frame, wrote Beltone in a note to investors.

Since Egypt is a low-income country, its CPI is weighted more heavily towards food items than the same index in a developed economy. And since food prices tend to be among the most volatile items in the Egyptian economy, the inflation rate, as it’s currently measured, has shown instability in recent years.

In January of 2010, the Central Bank will launch its Core Inflation Index, as a new means to measure inflation. Fruits and vegetables make up 8.8 percent of CPI. They will be excluded from the new index.

The idea, said the MPC, is to iron out price shocks and give economists and investors a better sense of inflationary pressures, though it risks marginalizing the effect of food price instability, which is a chief concern among many Egyptians.

With its decision to hold interest rates steady, the MPC recognized the increasingly prevalent argument that the global economy is beginning to make a comeback.

Having cut interest rates enough to stimulate growth, the MPC seems ready to let the market forces do their part.

“There are encouraging signs that the global slowdown has stabilized somewhat over recent months and the outlook for the international economy appears to have improved as well. This coupled with the domestic fiscal and monetary measures undertaken so far will help provide a conducive environment for the domestic economy, wrote Al-Mashat.

Topics: FJP

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https://www.dailynewsegypt.com/2009/11/06/central-bank-holds-key-rates-for-second-month/
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